Annuity Question

I have a tax deferred annuity that I can start drawing on. I now know that this wasn’t the wisest investment but here I am. What’s the best way to to get the money with the least tax hit? My initial advisor retired and gave his customers to another guy. The new guy suggested moving into a product where I can’t touch it for three years but am then guaranteed $1000 a month for life. My goal to to have some income from the interest and leave the “principal” to my adult child who has a learning disability. Its $200,000 +/- .

Two years ago, you asked a very similar question (Guaranteed Income for Life Plans - Yea or nay?). Is this the same question?

No it’s not. Do not fall into a sunk cost fallacy. You have the ability to transfer those assets into a tax-deferred IRA if you want/need, where fees are minimal, you have control over the assets, and have a whole lot more choices.

An annuity that is distributing 6% and paying annuity-level fees is probably not going to leave the principal to your son. There are some products that do this, but you need to very carefully read the fine print.

I would also talk to an estate attorney about setting up a trust for your son, if you haven’t already.

I don’t understand. I thought an annuity pays out a specified payment until you die and then there is nothing left. Certainly that is what my retirement annuity does (except that if I predecease my wife, she gets 60% of what I was getting, but when she dies, poof).

Yes, that is what many ‘standard’ annuities do. But there are others.

There are two main categories of annuities. Fixed annuities and variable annuities. Fixed annuities pay a fixed amount for a specified period of time (for life, for the life of a couple, for 20 years, etc.). They are straight-forward, easy to understand, and fairly low-cost (because there really aren’t any bells and whistles to attach to them, and they can be shopped around to the highest bidder).

Variable annuities range from complicated to indecipherable. They offer you a chance to keep your money invested, often with some guaranteed return options, as well as various income options when you decide to turn it on for income. Investment companies can offer you a whole host of different types, and the only real thing they have in common are fees so large they could choke a horse.

Honestly, I was wondering if fees motivated the advisor to suggest moving the money to a new investment product.

That was my reaction exactly.

It is really likely. It’s also an easy recommendation to make - you have a client who has already seen value in having an annuity, and the current rates (if it’s a fixed) and riders (if it’s a variable) are far more generous than they were in the recent past. The OP would most likely end up in a better product - but there are also options they need to explore outside of the annuity world.

He mentioned the high fees in the current product (tax deferred variable) as one of the reasons to go to this new one. I had the very vague feeling of being at a car dealer and decided to do nothing for the moment. What I’d like to do is get out of it ASAP while not getting killed in taxes. Then, put whatever is left over in something with a reasonable return and supplement my other retirement income with whatever returns that would generate and leaving the original investment untouched more or less. An IRA might be the way to go. I think I’ll talk to another car dealer, I mean, advisor.

As I’ve mentioned, a transfer to an IRA is tax-free.

Isn’t there an annual limit on the amount you can move?

As I said, I’m suspicious that the fees he might earn are, at least in part, what’s motivating him to make the suggestion. So you might ask, what are the fees and commissions involved in doing so.

No. You may be thinking of annual limits to contribute to an IRA - that is not what this is.

If you’re doing so before the annuity’s surrender period, you may be subject to surrender fees. They usually max out around 5-6 years. But no - there are no tax consequences of transferring a qualified non-annuitized annuity (i.e. funded with pre-tax dollars, which is what you have described) into a qualified brokerage account (or another qualified annuity).

I would be more direct than this.

When I was an advisor with MetLife, we had an annuity called the Shield (it’s still around). It has zero fees, and no commissions.

However, I was compensated for selling them. But it was absolutely not a commission, for whatever definition the compliance department came up with. It had no fees because it limited your upside in market participation. For instance, the Shield 20 protected your assets from a 20% downside loss over 5 years. So if you put $100k in today, and in 2029 the S&P 500 took a 30% hit, you’d come out with $90k instead of $70k. However, if the market did well, your upside participation was limited to something like 45%. So if the S&P 500 doubled in 5 years, you’d only come out with $145k.

Ask them what fees you pay, and what commissions they get for selling it. Also ask them what specific compensation they receive for selling it. Also ask them what the difference is between the annuity value of the contract, the cash value, and the surrender value, and to see an illustration that shows those three values over the lifetime of the contract. Do not put up with any bullshit when they balk at getting you this information.

Thanks for that. There’s also the fundamental question of whether to do anything; what’s wrong with the current investment that will be fixed by this change?

It’s not clear whether what you have is a qualified annuity within an IRA (funded with pre-tax dollars) or simply a tax-deferred annuity funded with after-tax dollars. If it’s the former, then you can surrender the annuity and convert the money to a traditional IRA without tax consequences. You will of course pay taxes as you take distributions from that IRA, just as you would any other IRA. If it’s the latter, then you will only pay taxes on the earnings once you annuitize and NOT on money used to fund the annuity (the “cost basis”), since it was after-tax money it has already been taxed. Unless you have had this annuity a very long time, the earnings are likely to be quite low. Post additional details so we can provide more help.

Good catch - that’s certainly a possibility. You won’t be able to cash out a non-qualified annuity until you’re 59.5.

You may also find that the surrender value/cost basis is less than what you contributed, as fees could very well have eaten this thing up. They counter this by giving you an “annuity value”, which is what they use to calculate your 5% income (or whatever percentage the income rider is). Of course, the income is taken out of the surrender/cost basis rather than the annuity value, and soon it zeroes out.

The product is he Best of America® America’s FUTURE Annuity. It is a Non-Qualified Annuity. Personal Rate of Return since 2001 is 7.7% My total investment is $47,500. The account balance is $189,750. This was funded with after-tax money. I stopped contributing about 5 years ago and have never touched it. I’m embarrassed to say that I don’t even know what fees I’ve been paying all this time. I have access to the fee table but don’t really know what it all means. t was a “set it and forget it” thing, with auto contributions since I opened the account.

I’m still working full time while also collecting a pension but have plans to ease into some sort of part-time work within a year. I just stared collecting SS in January and am, today, aged 66 1/2 (full age for me). I would like to supplement my soon-to-be-lower annual income with withdrawals from the earnings of an account while, at the same time not dipping into the “principal”. Or not too much, anyway. I’m arranging to meet with another professional in a few weeks but any additional input from Dopers is welcome

Is that the “annuity balance” or the surrender value?