Dumping an expensive annuity

Ryan,

Did I hear you correctly? You are in the financial services business and you personally own 3 variable annuities because of the benefits they offer??

What’s the long-term, after tax return on your VA’s, minus expenses? Ouch. Did you max out ALL of your retirement accounts first? If you have taxable savings left over, did you consider the benefits of a low cost mutual fund?

A broad market index fund like VTSMX or FSMKX or will reduce and defer your taxes indefinitely, because most of your returns accumulate as undistributed capital gains. Anything that comes out of a VA (that hasn’t already been bled to death by fees and commissions) will be taxed as ordinary income. Tap your VA before 59-1/2 and the IRS will hit you with a 10% early withdrawal penalty.

How much are you paying in expenses, 4% or more? A good no-load index fund will cut your annual expenses to 0.10-0.20%. If you invest more than 100K in VTSAX or FSMAX, that drops to 0.07%. And no outrageous surrender fees! What a concept!!

Perhaps you retreated into a VA because you are petrified at the prospect of short term losses in the stock market? In that case you have no business managing anyone’s money, especially mine.

Any FA who owns 3 VA’s because of the “benefits” that they offer needs a new FA.

Tired of the Uneducated,

NASD was not a regulatory agency. It was a lapdog that spent most of its time in bed with the industry it was supposed to be monitoring.

Hope this helps.

Variable annuities could be useful tools to save in only very unique circumstances. Unfortunately, most variable annuities sold through advisers have onerous fees, which make them inappropriate investment vehicles. To put someone’s IRA in a variable annuity should be illegal. For example, to pay around 2+% in insurance fees on top of the investment management fees for the sub accounts creates an enormous fee drag of approximately 2.5 to 3+%, which effectively acts as a transfer of wealth from your account to the insurance company. Most purchasers of these oversold products rarely understand their true costs, both explicit/opportunity costs and are rarely explained in detail by their financial adviser how it could impact their goals. The riders that most financial advisers tend to stress by emphasizing the downside protection of the investors assets from a stock market decline are almost always over priced from an actuarial valuation perspective.
I’ve had a lot of experience unwinding several variable annuities that were sold to my parents by unscrupulous financial advisers. It took 8 years to unwind/transfer via a 1035 exchange from the ING and Nationwide contracts to a Vanguard variable annuity (total costs between 0.34 to 0.64% all in depending on your choice of sub accounts) during which I watched my parent’s accounts consistently underperform both stock and bond markets because of the fees, even during the go-go nineties. This is not to say that the underlying investment options were poor investment choices, but when you add a 2+% handicap to any stock, bond, money market fund you will, not might, underperform.
Depending on your economic position it may be more desirable to invest in tax-efficient low cost mutual funds, max out IRA’s, 401(k)’s etc… and carefully diversify your assets beyond just stocks, bonds, and cash than purchase a variable annuity. If you really think it is in your benefit after running the numbers then I would suggest going with a low cost provider like a Vanguard. Also, for those financial advisers who personally invest in variable annuities, still think their high cost variable annuities are good sound investment vehicles I would suggest reading the prospectus, plugging the performance numbers in a spreadsheet and waking up to fact that you are paying thousands of dollars in fees for the privileged to underperform the markets, tie up your money for 8 years and overpay for insurance.

Many posters in this forum continue to promote the myth that the only way to invest in a mutual fund is to pay a large up-front commission or a percentage of your assets each year to an adviser.

This argument conveniently ignores the tidal wave of institutions and individual investors who have moved their assets to no-load index funds over the last 10-15 years.

Diversify your assets over a prudent combination of investment categories and rebalance them once or twice a year. Money magazine summed it up very nicely in a 5-page cover article just a few months ago.

A good fund family can cut your expenses to less than 0.25% per year. Over the course of 20-30 years, the compounded savings will add up to thousands and thousands of dollars.

Pay-to-play brokers and advisers are headed for the same dead end as travel agents and the recording industry. Lead, follow, or get out of the way.

Speaking as a relatively new, hourly fee-only, non-product selling financial planner, I find these comments to be most interesting.

Especially all the elephant tears being shed by our colleagues in the financial services industry.

The negative perceptions of “financial advisors” as expressed by these comments, are indeed, well founded. Anyone doubting this can read the various “Mole” articles, of which I have yet to find fault.

There are VAs with no-loads and relatively low expenses. And there are a few cases where they are useful. But there clearly was no objective analysis performed in this case.

Tax deferral is great, but for someone in a low current marginal tax bracket, this may just be setting up for future pain. Imagine the person retires with a huge nest egg (if everything goes well, which we hope will be the case). The VA holder’s marginal tax bracket in retirement may then be above their current one. Did anyone mention that a 0-5% long term capital gains tax applies to persons in the 15% and lower ordinary income tax bracket?

Is the person making use of all tax deferred accounts currently possible, including 401k/403b and Roth/traditional IRAs, before any annuity is contemplated?

When a commission based product salesperson (CBPS) must make their “production” numbers, can we really expect a 100% objective analysis, or even a thorough one? And will the recommendation be based on the client’s total financial picture, regardless of where an account is held or who the custodian is?

A few points based on what I did not see in these comments thus far:

1. Is the “financial advisor” upholding a fiduciary standard of care, stated in writing and offered without exception? This can be more reliable than professional certifications (letters after a name) or what firm he/she works for.

2. Some of this discussion mentions suitability. However, we should be discussing optimality for a particular situation, not mere appropriateness. The suitability standard is a very weak one.

3. Ask the CBPS: “If you could not sell me this particular VA (or any other financial product), would your recommendations be absolutely, positively, 100% the same?” If he answers “No”, then he’s telling the truth, but was not acting in your best interests to begin with. If he says “Yes”, then he’s probably lying or just rationalizing to himself. Given the abuse CBPS are in for if they don’t make their numbers, they must sell their products! Of course they will always recommend what they sell. The reverse is not always the case, because CBPS can not engage in “off the book transactions”, otherwise known as “selling away”. And No-load means No-commission to a CBPS, a definite “No-No” for him and his boss.

4. Keep in mind that the very best financial products do not need anyone to sell them. They sell themselves, usually with very little in the way of marketing expense. In the 21st century, the value of selling a financial product is zero. Sorry guys, but let’s get over it.

5. Don’t keep paying for the privilege of buying a financial product. It’s the analysis that engineers the financial plan. This analysis can not be expected to be free, if it is to be objective. 100% objective analysis is not tied to selling any product. Neither does it depend on how many commas and zeros are in your account balance. Would you take bad advice just because it was given for “free”?

A VA is inappropriate for someone in their 20s–generally. We do not know the full facts of this case so Walter’s general bashing of VAs indicates a lack of knowledge of what these investments can do for a SUITABLE client. I am in the financial services business and I personally own 3 Variable Annuities because of the benefits they offer. I will only offer it to very specific clients IF it is a suitable investment and even then, it will only be a PART of their overall investment strategy. Also, the last time I checked, Mr. Walter (EXPERT) Updegrave is not securities licensed by FINRA to actually offer clients advice on such complex financial matters. He is guided by his employer’s desire to sell magazines and attract eyeballs.

Annuities; Good when you have hidden all your money in 401k’s, IRA’s, Roth IRA’s and need to hide more. Remember an Annuity is like a insurance policy in reverse, when you annuitize it, your given an amount preselected by mortality tables for as long as you live. You die and no more payments, unless you select a 10 year, 20 year certain, surving or which ever one you choose. They are confusing and there are better investments out there. VA’s are very expensive and like Mutual Funds they are tied to the Market, but MF’s are less expensive than VA’s and if you die owning a MF, your family gets the cash rather than the insurance company.
Financial advisers should provide better services / info, but then there are commisions to think of.

A suitable candidate for an annuity starts at around AGE 40. Annuities are most suitable for people once they hit around age 50 and getting ready for retirement and age 59 1/2.

FYI…..A variable annuity is done by SEC regulated brokers and they are the ones that charge the customer. They also charge the customer for mutual funds, etc. Variable annuities are invested in mutual funds. A variable annuity is tax deferred and the mutual fund is not.

If you purchase a fixed annuity or equity indexed annuity then there is no charge on your account for the time of the investment.

Just to respond to a few items here without getting venomous. DM, lots of them do. Though the expenses are high the VA does have it’s uses. What would you do if a client has a few hundred thousand dollars extra (it happens more than you’d think ) that they want invested, but don’t want to pay taxes on an annuity, fixed or variable, is a good option. There are good VAs out there without surrender charges that can be used for this. The expenses are still high, 1.5% to 1.65% is typical, but avoiding unwanted capital gains / dividends and the taxes that accompany them are worth it.

Mark: Sorry to say it, but you’ve got a bad annuity on your hands. Almost no one who’s 26 should have a VA unless you’re a trust fund baby. Your answer to the surrender charges varies from insurance company to company, but most have a separate schedule for each deposit. Vanguard is a great company to work with if you’re a do-it-yourself type. Considering your age and invested amount, it’s a great place.

And no, I’m not an insurance agent. But I do work for one while I’m taking my CFA exams!

Rather than jumping on this bandwagon, I have a different opinion than most of you. I purchased a variable annuity when I was 26 (5 years ago). I did this because I was not happy with my current investments which were scattered among 3 different brokerages. I combined them all into 1 VA because they could grow tax-deferred which is a huge advantage. As mentioned, you can not take the large lump sum and just dump it into a retirement account due to annual contribution limits. If you have a minimum balance, the annual fee is waived. I think I paid the annual fee of $30 the first 2 years and after that, it was no longer necessary because my balance had grown above the minimum. I am averaging 20% growth per year since 2003 and have no regrets. By the time I am 59 1/2, I will have a huge nestegg to retire on. I still have an IRA as well as a 401k but I feel my VA is a great supplement to my investment portfolio. The term Variable Annuity has become so negative because most people don’t understand the ins and outs of them. When you get down to it, they really are not that complicated. I have no regrets. Yes there was a 7 year surrender period, but if you are parking your money there long term, what’s the big deal?

Hello everyone there. Sorry to disappoint you Mr. Updegrave but did you know that selling an annuity inside an IRA before the age of 59 1/2 triggers a 10% penalty (yes even if it’s sold within the IRA)? Well it does and therefore may not be an appropriate course of action for the young fellow. He could however transfer it to an annuity offered by a different insurance company that charges lower fees. This could all be done within his IRA so he wouldn’t have to pay any taxes or face a penalty.

Several posters, particularly Aaron, have bought into the myth that certain financial advisors work for free. IT DOESN’T happen. If you think you can handle your finances and invest in Vanguard as a do-it-yourselfer, then do it. You will save money. If you need advice, good luck calling the fund company to get it…or maybe you can ensure you’re on the right path to financial security by reading articles by an “expert” like Upgrave.

But, let’s just think about this for a moment for these kool-aid drinkers who think fee-only is the only way to go…

If you invested $20,000 in a mutual fund, would you rather pay a one time 5% commission up front (and perhaps an annual 0.25% 12b-1 fee), or 1% per year to a fee-only advisor? The real answer should be it doesn’t matter as long as you are getting value from the relationship. But for those penny-pinchers out there who think the commission-based rep is inherently out there to rip people off, you need to wake up to the fact that over the long term the fee-based advisor is going to make a lot more money off you over over the long term. In fact, as your money grows, the advisor is going to get paid more as your account grows.

I point all of this out in the interest of full-disclosure. Fee-advisors are not inherently good, and commission reps are not inherently bad. A fee-only advisor can give you bad advice and be incompetant the same as a commission rep. You need to focus on the reputation of the advisor, not how he or she is paid. Many financial advisors do business on both a fee and commission basis, depending on the client situation and products used.

It’s a real shame that so many people are deluded about how financial advisors are compensated.

In my personal experience, FINRA, like the NASD before it, is a joke. It is a lot of talk about “suitability” and “oversight”, but woefully short on action. The arbitration process is stacked against the investor, and in all but the most egregiously criminal cases they offer no relief- the arbitration panels are free to ignore their own rules, and there is no recourse once they render a flawed decision. Getting involved in one of those kangaroo courts is a waste of time and money. Bottom line, if you or one of your loved ones is victimized by an annuity selling weasel, get out when you can, but don’t expect FINRA to do squat.
BTW, Mr. Tired of the Uneducated, posting above- have you ever heard the old Texas saying “a hit dog hollers”. Find a legitimate way to make a living, you annuity selling dirtbag.

Whoever sold you this annuity obviously did you a disservice. An annuity should only be sold to clients who are nearing retirement which is why many variable annuities have a minimum issuing age requirement of 45. These can be great products to provide a supplement to your income in retirement, however at your age you should avoid these products at all costs.

To all of those out there bashing variable annuities, I would challenge you to find a client who bought a variable annuity with income protection sometime in the past 2-3 years. I can guarantee you that they are more than happy with the guarantee they are paying for and would say the expense is more than justified.

I love variable annuities.

I am in my early 30s and have a high income– financial “advisors” of one sort or another are tripping over themselves to “take care of” my money.

I know that if a variable annuity is one of the first two products offered, the “advisor” is useless. I order the most expensive entree at the lunch he pays for, look really interested and seem willing to invest huge amounts, and then relegate him to voicemail only status.

The other product like this is “whole” or “permanent” life insurance. Though, there may some role for this product in certain states if you have already maxed out available IRA contributions, and you face a reasonable risk of litigation in the future. In some states the life insurance isn’t a seizable asset, thus you can contribute a small percentage of your savings beyond IRA contributions (say 10%) to this as a conservative investment.

I wonder how many of these industry hacks actually owns a variable annuity?

What a disgusting way to make a living.

The fact is that annuities are pushed indiscriminately to people of all ages because very few people understand the full details of an annuity. My experience is that reputable financial advisers generally do not recommend annuities.

I was convinced by a salesperson to buy a variable annuity when I was younger and did not understand these kind of investments. When I finally realized that a large fraction of my returns were being eaten up by by annuity fee - I wanted to pull out my money. But guess what - there is a surrender fee!!

In my opinion, salespeople who push annuities on inappropriate young people are just parasites, living off the earning of hardworking people.

It is very obvious the buyer was not clear on the expenses and fees attached to her annuity. No surprise there. It is also very obvious that as a 20-something she was not a suitable candidate for an annuity. So its safe to assume she had the misfortune of encountering one of the many less-than-highly-ethical sellers of these products.
If she prefers to avoid loss of her capital by paying surrender fees, she could wait until the market comes back and the annuity gains a sufficient amount to cover the surrender fees. Based on what she wrote, however, this annuity may be encumbered with exhorbitant fees and/or marginal investment selections. Thus it may be a long time, if ever, for this annuity to gain sufficiently to offset the surrender charge.
Since the annuity hasn’t gained much in its three years, she will not be paying a tax penalty on gains. Moreover, any gains are offset by the loss of surrender charges, which, further, triggers a tax deduction for her.
If I were her I would bite the bullet and surrender the annuity. If she invests instead in low-cost index funds it will take about three years for her money to “catch up” and then get ahead without being encumbered by high fees.
She would also eliminate the psychic pain of the annuity.

I run into more people who were hood-winked into buying annuities; improbable people. While some of the posters on here sound like they are scrupulous in the selection of clients appropriate for annuities, most of their fellow advisors are much more opportunistic, at their clients’ expense. How does the seller of this particular annuity sleep at night knowing that he has shafted his young client??

Excellent comments on the cost and complexity of variable annuities. The difficulty of providing a simple answer to a simple question on variable annuities just how difficult they are to understand. I have been in the financial services indsutry for over 40 years and the very last product I would buy is a variable annuity as they are structured today.
Nice job.

I just love the self-serving feeding frenzy that erupts every time Walter dares to lay out the cold hard facts about annuities.

Bottom line: the vast majority of people who want to participate in the market with no downside risk don’t need an annuity, they need to be educated.

When was the last time you heard a financial adviser working on commission recommend a long term commitment to a diversified portfolio of no-load index funds?

Every time Walter prints another column about annuities, or investing in general, the available pool of naive investors who fall for these ridiculously complex and expensive insurance products shrinks a little more.

Wonderful entertainment! Keep up the good work, Walter.

For an “expert,” Walter doesn’t seem to have more than a cursory knowledge of annuities. His “E-Z Disclosure Form” looks incredibly similar (and far less detailed) to the disclosure forms that are required by most states and even more broker-dealer firms.

You know, after reading all of the posts regarding this subject, I am utterly amazed at the individuals who are so blatantly spewing venom at financial advisors, and the “fees” or “commissions” they may or may not make. This message is for those of you who purport to know everything about the financial planning industry and that we are “gouging” people and only care about commissions…ANYONE WHO HAS BEEN IN THIS INDUSTRY FOR A LONG TIME WOULD NOT EVEN CONSIDER TAKING YOU AS A CLIENT! You obviously know everything, so why bother blogging? After all, we planners are all out to scheme, hurt, offend, and rob from the poor, unsuspecting public, right? Never mind the fact that we have more scrutiny governing our profession than ANY OTHER IN THE WORLD…PERIOD. And for the really SMART GUY who mentioned the NASD earlier…get up to speed, Mr. Know-It-All. The NASD merged about a year ago with another regulatory agency, and is now known as FINRA (Financial Industry Regulatory Authority). You know, it never ceases to amaze me how people hate lawyers, doctors, CPA’s…ANYONE who is successful and making a good living by providing educated, solid, solutions for those who understand and value the art of delegation. I do not know everything about everything…some of the wisest and smartest people on the planet are those who have the capacity to be a TEAM PLAYER with their advisors, working as a team, to facilitate the goals and objectives of each individual investor…and dare I say, that each individual investor must be treated differently, by law? If you think not, go check out the licensing renewal requirements by FINRA…it’s on one of the exams!

J C Simsbury must be an Insurance agent with some fear of losing commissions if people don’t buy annuities. Fact is there are few if any situations where an annuity is a sensible investment.

There best place to start for this is by going to AnnuityMD.com. they have a program for annuity owners who are in the wrong annuity.

It’s too bad that there isn’t a low cost way to get a second opinion before you sign up for that expensive annuity. Most teachers would be better off signing up for a low cost mutual fund instead of a high cost annuity for their 403B plans. But who is there to give them unbiased advise? SEC and other regulators make it almost impossible for people to offer their expertise on a low cost, occasional basis.

Thanks for all the feedback guys. The good news is, like the original person asking the question, I don’t have much money in the VA inside the Roth IRA. About $3000.

Do the surrender charges timeline start at time of initial investment, or at time of last investment made? I started investing in it over 2 years ago, but was putting some money into it monthly. I’ve stopped investing in it starting this month, without giving a concrete reason to the advisor why, my real reason being everything that’s discussed in everyone’s comments. I’m only 26 and realize this may not be the best spot for my money.

I already have opened accounts with Vanguard with the plan to consolidate my investments with them. I’m just trying to do all my homework before I make the big jump.

Another typical column bashing annuities. Once again, yes for someone in their 20’s annuities are prob a bad deal.

How about someone who is about to retire? Has this so called expert ever heard of the potential risks of “sequence of returns” on a retirement portfolio?

Bottom Line: People buy annuities to participate in the market with downside protection. And like anything you protect, you must pay for it. And just because you’re willing to guarantee that money does not make it a bad decision as many people make these decisions based on emotion(why else would a 60 year old put 80% of their retirement money in CD’s?)

Some people are willing to pay for it and some people are not. And for many who do not, they tend to be overly conservative and aren’t properly allocated - and all the talk of indexing won’t prevent them from cashing out when the market is down 15%

But of course why discuss this. After all, annuities are bad, just bad.

Mark, If it makes you feel better, file a complaint. But first things first, let’s get your finances on track. If you are young, there are only a few reasons to get into an annuity (tax-deferral above and beyond 401k and IRA limits, stretch inheritance, need the guarantees to help you sleep, protect yourself from a lawsuit if you are in a risky industry ex. doctor). I sell a lot of annuities but they are only good for people with shorter time horizons who need either the income guarantee, death benefit, or principal protection. If you are young, you don’t need it. Open a Roth and put all new contributions into Mutual Funds. Then, as I mentioned in the earlier post, transfer the funds out if it is out of surrender. If it isn’t, transfer whatever part is surrender free into your mutual fund roth. Get an annuity around retirement time if you need it. I am not bashing annuities. I sell them. If you are under the age of 45, you probably do not need it.

Firts and formost, you have to look at the company you are setting up a VA with. Not all variable annuities are the same. Secondly, always look at the fees being charged. Again, not all companies charge the same amount of fees. Do your research.

I’ve always felt that prospectuses and all those stock reports are somewhat a waste of paper especially for people who only invest a little. Especially if you’re buying individual stocks and the paper used to print the annual report is 5-10% of your investment.

What’s more useful for people buying variable annuities are comparisons to other investments. People are asked to sign that they know how much they’re being charged. What they aren’t told is what other investments charge. 3% fees don’t sound so bad until you hear that a no-load mutual load has fees so much less.

Another thing this investor might consider is if she does decide to actually surrender the annuity, she can discuss the probablity of taking the loss as an ordinary income loss on her tax return, thereby mitigating some of the early surrender charges and fees. I agree with the other respondent; there is nowhere near enough information to make an appropriate recommendation in this case. Is this investor maxing out her 401(k) and other investment options? Is there some reason why a representative would have put her into a VA? Especially considering the incredibly increased regulatory scrutiny of the sales of variable annuities, I am going to have to disagree with you on this one Walter. FINRA (Financial Industry Regulatory Authority) has absolutely brought the hammer down regarding variable annuity sales. The suitability requirements that must be met are onerous, and for good reason. Too many representative were selling these extremely complex financial instruments in unsuitable situations and without truly having the academia to know what they were doing. The truth is, annuities are primarily designed for a lifetime income stream. I rarely use them for accumulation, UNLESS there is a situation where an annuitant is needing the creditor protection aspect of annuities (meaning they cannot be attached in the state of Texas), the tax deferral, AND the death benefit if an annuitant dies. All three of these criteria must be met before I will even consider an annuity. As mentioned, I specifically use them for 25-50% of a retiree’s income stream so as to guarantee the core basic needs of the investor are being met. In doing so, it allows an investor to perhaps be a tiny bit more aggressive with the remainder of their portfolio in order to hedge inflation.

Bryan in L.A. is 100% correct. There is not enough information to appropriately respond to the requestor.
Given the investors time horizon, it is likely that the annuity sale was not suitable. Variable annuities were created to give guarantees (insurance) while allowing the annuity owner to have the benefit of potential gains in the market. The additional cost is indeed related to the insurance. It is more likely that a variable annuity would be suitable for someone witha shorter time horizon that is looking for some protection on their money, while leaving it in the market. There are many good annuity options out there now to accomplish this task.
As with all products, the buyer should do their research and comparison shopping. An educated consumer is happy consumer. If a person buys an annuity product, or any product for that matter where the fees, risks and benefits are not accurately disclosed, the customer has every right to file a complaint with the selling firm.

I think the reason the “advisor” put him in the annuity is pretty obvious. A big fat commission. I’m sure the guy was a CFP with a ton of certificates on the wall too. The problem with them isn’t that the fees etc. aren’t listed somewhere but that you’re trusting your planner’s advice that the fees are reasonable for what you’re getting, and most of the time they aren’t. Oh, I’m sure there’s a couple people somewhere who get some real benefit out of them, but the reality is the vast majority of those things are just a way for the planner to shuck clients. I didn’t figure out how bad mine was I started looking at the stunning fees that the funds available in my “investment vehicle” charge. The one index fund I have available in it, for instance, is the notorious Advantus Index 500, which I much later learned is one of the most frequently cited examples of a index fund with absurd hidden costs. Fortunately, I’m older and wiser now, and the financial planning industry has permanently lost a client.

There may be some options here while still in the VA. Check to see if you can go to a guaranteed cash bucket for the time being. It will pay a guaranteed interest rate (something is better than nothing right now), the VA holder will be on the sidelines and, most poeple do not know this, but when you are in the guaranteed interest rate bucket of some VA’s, there are no M+E expenses. So, you’re safe from the market ups and downs, you have eliminated the “high” price of the VA until the market gets going again,and, you won’t have to deal with surrender charges. Once the VA runs its course, evaluate and move on. Someone in their 20’s is probably not the best candidate for the VA and the “Living Benefits” certainly would not make sense.

what about a good old fashioned 30 year u.s. treasury bond instead?

guaranteed interest and 100% return of principal on maturity

and you don’t even need an agent to buy one

I’m sue you won’t post this! But yet again another stilted critique of VA’s
In these extraorinary volitale times why wouldn’t you want rock solid Guarantees. Wall ST. keeps screwing the average investo. For an extra 1 percent in fee’s for the guarantees of principal and income stream seem to help my clients sleep well at night.

There are very few reasons a client in their 20’s would use an Annuity… Like, enormous inheritance turned into a lifetime of steady income, but even so… still depends, I’d like to know why this person was told purchasing an annuity at their age was the best idea…

There is another alternative. If the annuity is underwater, (worth less than initial investment)and held outside an IRA, you may be able to take an ordinary loss for tax purposes.

Mark-

If your annuity is out of it’s surrender (usually 7 years after you bought it), just open a Roth IRA and transfer the funds in. IRA rules trump annuity rules. Call your rep and ask if your annuity is stils in it’s surrender. If it is, ask how much is surrender free and transfer that out. Every year, a little more will become surrender free and transfer that part out. One thing to look out for is that some companies don’t allow partial surrenders. Make all new contributions to the new Roth with lower fees.

You briefly touched on the 401k, but did not go into much detail. My son (in his 20’s) has an annunity as part of his 403b (school), can that be rolled into his Roth?

Another option if it’s a non-qualified annuity and the surrender fees are high, is to withdraw 10% per year if allowed in the contract. Most annuities will provide you with the ability to withdraw 10% per contract year with no surrender fees. Growth of the investment will still be taxed, however, no surrender penalty is charged. Then the money could be used to fund a Roth IRA.

This is the problem with so-called “experts”. Take a very specific case and turn it into an entire column about how bad VAs are. There are very few, if any, situations where a VA is a suitable investment for someone in their late 20s. In this case, the VA was likely missold by the agent, but that does not mean the VA itself is bad, it is just bad for this client. VAs, as a part of a clients overall investment strategy, can help solve many of the risks a person faces in retirement. Yes, those solutions come at a cost that is slightly higher than that of a traditional mutual fund, and that should be clearly disclosed at the point of sale. If the client feels that it is worth it to pay an extra .5-1% in order to have a guaranteed income stream they cannot outlive, that is their choice. When you rent a car, do you pay the extra $20/day for the insurance? It just depends on whether you like the extra protection it provides. I never paid for the insurance…until I got into an accident in my rental car once, now I always do.

The bottom line is that VAs can help people when used correctly and provide them with the securtiy to stay invested in the market when their gut is telling them to sell out and get in cash or bonds. I do not own an annuity as I am only 30….but I will definitely purchase one in 20 or 30 years as I approach retirement because I understand what it can do for me. Unfortunately because all the “experts” bash VAs with such regularity, most clients that could benefit from them are too scared of the word annuity to hear what it can do for their retirement portfolio. Responsible journalism is something Walter should look up.

Bryan - it’s hard for a person who knows nothing about investments to decifer a multi-100 page prospectus on their VA.

Clients need to be taught about suitable investments - that’s really hard when you have your commission angel on your shoulder whispering about how much this client is worth to you in commissions.

Fee-Only - the only way to go.

My elderly parents own several variable annuities, which I have been gradually liquidating. They actually have one which has generated a $10,000 loss. To add insult to injury, the Putnam representative that I spoke with advises that this loss is not deductible for income tax purposes as either an ordinary loss or a capital loss. Can this be true?

Annuity inside a Roth IRA….wow talk about a broker bilking fees. If you qualify for a ROTH it automatically grows tax deferred and is tax free after age 59 1/2. Usually the annuity is nothing but additional commissions for the broker. I never sold one while I was a Registered rep if I could use other products ie(know your client). I now educate the public about some of the smooth talking brokers who put people in duplicate products not needed. Go to Vanguard.com set up a ROTH online have the money deposited via through a payroll deduction or out of your account. As for the current VA I would check all surrender fees and why was it sold to you in that manner(file a grievance with the Broker Dealer call the NASD hotline if they give you a problem) (NASD.gov) As for the new ROTH with Vanguard pick your funds based on age, risk etc SP 500 or total market index funds would be good starting funds for beginning investors. Vanguard has a free Customer Service line and very low fees. I hope this helps

10% Fees? These surrender charges are incurred for “early withdrawal” not fees. A five year bank certificate of deposit withdrawal may charge early surrender charges of 2-3% but is rarely called fees.A ten year suurender period on
a variable annuity is not common.

I really think you missed some key points in your response:

1. Financial advisors do not work for free; they are not charitable organzations. Whether it is an annuity, a mutual fund, or a stock and you want help with your investment strategy you will pay for it in the form of a commission or fee. One is not inherently good or better than the other. It’s about value delivered by the advisor.

2. Mutual funds and other investments also have fees and expenses to operate them. Expenses in a VA might be higher, but you are paying for the insurance and guarantees. If you don’t want those features, then you should choose a different product.

3. You fail to point out that this person could just as well been asking you about a mutual fund with no growth. This market has made everything look flat to down over the short period this person has owned this annuity.

4. You also failed to ask the most important question. Why does someone in their 20s own an annuity? You prefer to spend your time attacking the product rather than addressin this more important suitability question.

I’m not sure what expertise you have, but it seems that you make judgement on products with very little knowledge of what benefits the client elected, what the purpose was for the investment when it was purchased, and what other assets the client has and the liquidity of those assets. Is it even qualified money as it stands now? Will other less expensive products have any guarantees on income, growth or death benefits? Probably not. You should cover all of the benefits of a product along with the purpose of the product if you’re going to discuss drawbacks. Very one sided article.

Don’t forget that, although annuities have higher fees, and are not suitable for all people, they serve a purpose for many people. The downside protection offered by an annuity is well worth the expense to many investors who want to try to obtain stock market returns while minimizing the risk. Also, what other investment vehicle is there available that will offer a stream of income that the annuitant cannot outlive?

If this clietn is in her late 20s then an annuity is very probably an inappropriate vehicle for investment. There may be other reasons why the registered representative put her in such a product but without additional information it is not possible to tell.

The article does not discuss the possible tax consequences of converting a traditional IRA to a Roth; that is a disservice to the author of the letter. She should be referred to her tax consultant.

Variable Annuities are not necessarily a bad product as stated in the article; they are insurance products with an investment component. If you do not require the riders and other insurance components then you should not purchase the product since the M&E fees (the costs for providing the insunce riders etc) may be considered high, but are definitely high if you do not require the riders.

Again, based on this client’s age, and having no other facts, a VA appears to have been an unsuitable product and she may wish to file a complaint with the broker/dealer.

Regarding the fees: these are all laid out in the prospectus which is given to the client. Generally Broker/dealers require that a client sign a document acknlowleding receipt of a prospectus, as well as a statement saying that the client is aware of fees and/or that the prospectus has been received and read.

When you say inside an IRA do you mean a Roth IRA? I currently have an annuity inside a Roth IRA and am looking to do the same thing mentioned in this article.