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Author: HAIRBEAR2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Annuity Advice Date: 8/4/1999 2:32 PM
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Unfortunately, before I discoverd Fooldom, I went to a financial advisor (I know) and started a retirement annuity account, along with other products I have long since canceled. Now, I do not have much invested in this account, only several thousand dollars, and it has returned about 11-12% "tax deferred"every year since its inception in1995. I stopped my small monthly contributions a few years ago but am wondering what to do now. Would it be more Foolish to "cash-in" the account and pay the penalty of withdrawal of about $300 plus the capital gains tax and invest it on my own for the longterm? Just leave it alone? Or, restart monthly contributions? I already started a Roth IRA and am maxed-out on my 401K. And, I just started with an online broker to begin investing in some "obviously great companies" ; starting with a DRIP and going from there. Any help would be appreciated.
Thanks.
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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12831 of 76418
Subject: Re: Annuity Advice Date: 8/5/1999 12:48 AM
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<< I do not have much invested in this account, only several thousand dollars, ...I stopped my small monthly contributions a few years ago but am wondering what to do now.>>

I have generally found that when you step into a trap, the best thing to do is to gnaw off your leg and move along. ;-( In your shoes, I would be inclined to pull whatever chestnuts I could retrieve out of the fire, and invest whatever is left in something better.

One of the common errors that people make is to stick with a bad choice in an attempt to save face and to avoid recognising a loss.

Good luck,
Ray




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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12834 of 76418
Subject: Re: Annuity Advice Date: 8/5/1999 7:13 AM
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Rayvt writes,

<< I do not have much invested in this account, only several thousand dollars, ...I stopped my small monthly contributions a few years ago but am wondering what to do now.>>

I have generally found that when you step into a trap, the best thing to do is to gnaw off your leg and move along.


Ray,

That's the best annuity advice I heard to date. Other than, of course, don't buy an annuity in the first place.

intercst

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12838 of 76418
Subject: Re: Annuity Advice Date: 8/5/1999 9:29 AM
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Greetings, HairBear2, and welcome. You wrote:

<<Unfortunately, before I discoverd Fooldom, I went to a financial advisor (I know) and started a retirement annuity account, along with other products I have long since canceled. Now, I do not have much invested in this account, only several thousand dollars, and it has returned about 11-12% "tax deferred"every year since its inception in1995. I stopped my small monthly contributions a few years ago but am wondering what to do now. Would it be more Foolish to "cash-in" the account and pay the penalty of withdrawal of about $300 plus the capital gains tax and invest it on my own for the longterm? Just leave it alone? Or, restart monthly contributions?>>

While I find Rayvt's response most appropriate, prior to cashing out during the surrender period you might want to see if you want to take that penalty. You say it's now about $300 on several thousand invested. That has to be close to 10%. How fast can you regain that 10% elsewhere versus just letting the money ride until the surrender penalty expires? Also, you talk about paying "capital gains tax" on the earnings. Be aware that any gain in an annuity is always taxed at ordinary income tax rates. Additionally, if you take them now and if you're under the age of 59 1/2, you must also pay a 10% early withdrawal penalty.

Bottom line: Tote up the surrender penalty, the taxes, and the early withdrawal penalty. Subtract that amount from the annuity's value to get the net proceeds available for investment. Compare investing that amount in an alternative against letting the money ride in the annuity over a fixed period. Compare the results on an after-tax basis, and that should tell you what to do.

Regards..Pixy

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12840 of 76418
Subject: Re: Annuity Advice Date: 8/5/1999 9:43 AM
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If the annuity you have is underperforming, one option you have is to transfer it to a better annuity. There is an article in Business Week Jul 5 issue, p 98 (and I am told you can get it on the BW web page) that tells you how. You do a "1035 exchange", apparently the equivalent of an IRA rollover.

Vanguard, Fidelity, Scudder, and T Rowe Price are listed in the article as firms that offer low cost, no load annuities with little or no surrender charges.

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Author: hvyevy2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12844 of 76418
Subject: Re: Annuity Advice Date: 8/5/1999 11:20 AM
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I have generally found that when you step into a trap, the best thing to do is to gnaw off your leg
and move along


One of the common errors that people make is to stick with a bad choice in an attempt to save
face and to avoid recognising a loss.


Oh, Rayvt, you are so right. Except that my experience is that I am a poor judge. Two examples. My Wiseman put me in Motorola and EMC. They immediately went down. I hung on for a year (seemed like 10) and saw them doing nothing so I said to sell. He did. They immediately went up. He laughed and said "From here on out, I will tout all my other customers on whatever you sell". Oh, woe. But I have recovered. Thanks for the advice. Hope others have seen it and will heed it.

hvyevy2

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12853 of 76418
Subject: Re: Annuity Advice Date: 8/5/1999 2:47 PM
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Is it possible the underperformance was related to the choice of funds? You have not told us whether this is a variable annuity or a fixed annuity. A fixed annuity promises a certain amount of interest, and is an expensive way to do something not very well. A variable annuity offers you choices of mutual-fund-like subaccounts. One mistake people tend to make is to get an annuity, which is intended to be a long-term investment and then be very conservative in their choices. If you have over a 10 year investment horizon your variable annuity choices should be stock accounts. Maybe some in international, some in blue chips, some in small companies. To add to the account monthly is called "dollar cost averaging" and that is Foolish.
Now, if you were in stocks and the advisor underperformed, you want a different advisor, and that means out--with the 1035 exchange being a good choice. But if you were paying the extra fees for an annuity and then investing in money markets, you did it to yourself!

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Author: skofield Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12909 of 76418
Subject: Re: Annuity Advice Date: 8/6/1999 3:29 PM
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Annunties can be a bummmer. Due to tax considerations, IRS penalties, etc. I advise your keep your current annunity. But consider the following:
Switch to a low cost provider: IE T Rowe Price and Vanguard. This can save you 1% at least per year in mortaily fees and lower expenses on your mutual fund coices inside the annunity. Check on your annunity contract for the cost of cancelling your contract. Most will charge your starting at 7% of the value of annunity in year one and decrease it 1% per year unitl after 7 years the cost is zero. Then is the time to switch your contract.

In the future only use annumites after maximizing your IRA and 401/403B at work.

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Author: susanna212 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12914 of 76418
Subject: Re: Annuity Advice Date: 8/6/1999 4:28 PM
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I do not think that you understand the implications of what you have done by purchasing an annuity.

Depending on the issuer of the annuity, there are various types of charges on top of the insurance cost which can also vary a lot.

First there is a penalty from the federal government for redeeming monies prior to age 59 1/2.

Second there may or may not be "surrender charges" which mean that monies taken out are subject to a penalty if the monies have not been in the annuity long enough. Vanguard, TIAA-CREF, and I believe Charles Schwab have annuities withoug surrender charges which are approved in New York. Janus has such an instrument approved in other states.

However, and this is another problem, monies removed are not taxed at the capital gains rate but at the full income rate. These instruments function more like after tax IRAs in that respect.

On the positive side, annuities do not go through probate, and monies do not have to be withdrawn before age 85 so they can provide temporary cash during probate and also serve as a shelter for individuals who have to cash out IRAs, 401Ks, 403bs and other retirement vehicles at age 70 1/2 or who have maxed out on all other instruments.

Since the lowering of capital gains tax, they are of less value than they used to be.
Best
Susanna

.

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Author: Staneng Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12927 of 76418
Subject: Re: Annuity Advice Date: 8/6/1999 7:34 PM
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Gee !!! The poor guy is "only" making 11-12% annualized return, plus it's on a tax deferred basis. Makes me weep. :(

Don't be greedy, people, that's a reasonable average return.

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Author: han515 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12967 of 76418
Subject: Re: Annuity Advice Date: 8/8/1999 9:51 AM
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Dear HAIRBEAR2:
There is no reason to "cash-in" the account with pay penalty of withdrwal. Keep it as long as you hold, and take advantage of tax deferred status. As you know you don't have to take money out at 70 1/2 year old like IRA.
Tacosquid.

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Author: 4638 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12976 of 76418
Subject: Re: Annuity Advice Date: 8/8/1999 1:45 PM
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I am much worse off than you, reading what everyone else thinks of annnuites! I am 61 and have about $300,000 stuck in annuities! they seem to have done pretty well because they are in aggressive growth things, but I have now been reading all thehorror stories about getting out, I have to sit on them for two more years, then the cost will not be so prohibitive.

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Author: BetteG One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12977 of 76418
Subject: Re: Annuity Advice Date: 8/8/1999 3:13 PM
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"While I find Rayvt's response most appropriate, prior to cashing out during the surrender period you might want to see if you want to take that penalty". Pixy's response tothe above has prompted me to get in the mix. I have a pretty good-sized variable annuity with no withdrawal fee and it is all IRA. I think it is a good annuity but I am totally sizzled since I found out how high my agent's fees are. (Since I became Foolish). As an IRA, this annuity can be transferred without tax consequences. I've been trying to compare my problem with that of HairBear2 and wonder if I'm missing a problem I'm not aware of. My plan is to roll the annuity over (through a discount broker) into recommended longterm Dow stocks. Am I making a big mistake? BG

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12981 of 76418
Subject: Re: Annuity Advice Date: 8/8/1999 4:33 PM
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Greetings, BG, and welcome. You asked:

<<I think it is a good annuity but I am totally sizzled since I found out how high my agent's fees are. (Since I became Foolish). As an IRA, this annuity can be transferred without tax consequences. I've been trying to compare my problem with that of HairBear2 and wonder if I'm missing a problem I'm not aware of. My plan is to roll the annuity over (through a discount broker) into recommended longterm Dow stocks. Am I making a big mistake?>>

In your case and because the annuity is already inside an IRA (rather like wearing a raincoat indoors), you may very well do better by surrendering that product. That's particularly true if you're a Foolish investor. Still, you should do the comparison of the expected alternative rate of return to that of the annuity. If over the same time period the alternative would be better, the choice is obvious. But you still have to the analysis, and only you can do so.

Regards..Pixy

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Author: Gypsy2Flyer Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12993 of 76418
Subject: Re: Annuity Advice Date: 8/9/1999 9:39 AM
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Hi HairBear..........Read your message, and I can feel for you. I've been in stocks for 0ver 30 years. My only suggestion........keep those DRIP's, and why not look into a gift annuity. Tax benefits, steady stream of income for life and you would be helping a good cause. Stay with your discount groker and have fun. You're a long time quietescent.

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Author: bailey7094 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 12996 of 76418
Subject: Re: Annuity Advice Date: 8/9/1999 10:08 AM
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"4638" writes:

I am much worse off than you, reading what everyone else thinks of annnuites! I am 61 and have
about $300,000 stuck in annuities! they seem to have done pretty well because they are in
aggressive growth things, but I have now been reading all thehorror stories about getting out, I have
to sit on them for two more years, then the cost will not be so prohibitive.


You may wish to examine your contract(s) for annual withdrawal exceptions. I have two contracts with Lincoln National and they allow me to withdraw 15% per year prior to expiration of the "loading" with no withdrawal fees. After learning about other possibilities, I started doing just that using "rollovers" to other plans in order to get away from the annuity contracts.

FoolishProf

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13008 of 76418
Subject: Re: Annuity Advice Date: 8/9/1999 2:53 PM
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There's an Annuities board at--

http://boards.fool.com/Message.asp?id=1380226000002000&sort=id

Its just beginning, but a good place for continued discussion of this topic.

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Author: barski3 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13014 of 76418
Subject: Re: Annuity Advice Date: 8/9/1999 10:03 PM
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my experience with a variable annuity covers a span of roughly 12 years. I make a one time deposit of 8Mback then. this annuity was based on dean witter dividend growth, thru the northbrook variable annuities. No withdrawals were made, the increase in worth was reflected in the share price. The annuity now is worth over 23M, a total return of over 10 %

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Author: BAbrams Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13115 of 76418
Subject: Re: Annuity Advice Date: 8/12/1999 6:44 PM
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Pixy,

Thanks for your response regarding the issue of cashing in a retirement annuity. I have a similar problem. I was talked into buying a variable life policy for my wife and boys by a Wise financial planner about 6-7 years ago. Of course at the time we didn't know any better and he didn't tell us about the 10% penalty. We are seriously thinking of terminatingthe policies and I realize that there are tax consequences. I was under the impression that the penalty to be paid (in this case a whopping 20% or more)can be considered a loss and offset the taxes and 10% penalty. Is this true?

Thanks again.

Barry

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13127 of 76418
Subject: Re: Annuity Advice Date: 8/13/1999 7:40 AM
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Barry asks:

<<Thanks for your response regarding the issue of cashing in a retirement annuity. I have a similar problem. I was talked into buying a variable life policy for my wife and boys by a Wise financial planner about 6-7 years ago. Of course at the time we didn't know any better and he didn't tell us about the 10% penalty. We are seriously thinking of terminatingthe policies and I realize that there are tax consequences. I was under the impression that the penalty to be paid (in this case a whopping 20% or more)can be considered a loss and offset the taxes and 10% penalty. Is this true?>>

If you have an annuity that you purchased with after-tax dollars and you surrender it in full, then you will be subject to income taxes on any gain over your cost in that annuity. Say you paid $1,000 over the years and the annuity is now worth $1,500. You cash it in and pay a surrender charge to the insurance company of 20%, or $300. Your net is $1,200 of which $200 is gain. You will be taxed at ordinary rates on that $200 plus an early withdrawal penalty of 10% if you're younger than age 59 1/2.

Same case, but this time the annuity is worth $1,250. The surrender charge of 20% is $250, so you net $1,000. There is no gain (and no loss), so you pay no income taxes or early withdrawal penalty.

Same case, but the annuity is worth $1,100. The surrender penalty of 20% is $220, so you net $880. In this case you have a loss of $120, but no income taxes or early withdrawal penalty on the distribution. The loss may be claimed as a Miscellaneous itemized deduction on Schedule A of your income tax return, and it is subject to the 2% of adjusted gross income limit pertaining to those deductions.

Regards..Pixy

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