How to Cut Your Taxes as Short-Term Interest Rates Come Down

If interest rates come down, according to our fixed income investment guru, “the reductions will likely be at the short end of the yield curve with rates holding steady at the longer end.” Or in layman’s terms, if we move to a more typical yield curve, you’ll see rates on long-term bonds (underlying annuity rates) be substantially higher than on short-term securities and CDs. That may also mean that rates on new annuity contracts are holding steady — although maybe not for long.

For our typical investor, Sally, who is 70, her lifetime income from a $500,000 investment sits at about $42,000 per year, or 8.4%, which means nearly double the current short-term rate of, say, 4.25%. But do you give that advantage away in taxes? That answer and more below.

For our investor above, here’s a portion of the information she got on March 24 in her annuity quote.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.

Profit and prosper with the best of expert advice – straight to your e-mail.

Annuity quote for an investor.

(Image credit: Courtesy of Jerry Golden)

We learn this from her report:

  • Only $9,800, or 23%, of her payment is taxable during an initial exclusion period
  • Her initial exclusion period continues to age 85
  • Assuming an overall income tax rate of 20%, she receives: 97.5% of her annuity payment after taxes through age 85 and 80.0% of her annuity payment after taxes at ages 86 and over