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Greetings, Dundee 99, and welcome. You wrote:

<<I am 32 and have about $2,500 in a variable annuity that I'm considering cashing out and put into a self- directed IRA.>>

See the reply I just left for atcharles in post 17321 at . You must first determine precisely what kind of annuity you have. If it's one already held in an IRA, then you should be able to surrender it, pay any penalties due, and transfer the proceeds to either a traditional or a Roth IRA. If you transfer to a traditional IRA (again assuming you can), then no taxes and no penalty will apply. If you transfer to a Roth, then you must pay income taxes on anything that hasn't been taxed previously. If you keep part of the money to pay taxes on the conversion, then you will be assessed a 10% penalty on that amount for an early withdrawal penalty as well. In general, if you must use part of the proceeds to pay the income tax bill, the conversion to a Roth IRA does not make sense.

<<I haven't contributed to it for over a year now because I'm a stay-at-home mom now. I noticed the yearly fees really cut into my actual earnings plus I wasn't pleased with the performance this year.

I know I'd have to pay a back-end load for cashing out but as long as I put it in an IRA account will I avoid the federal withholding tax?>>

Yes, assuming you have a TDA and not a TSA. If you have the latter, you cannot transfer the proceeds to an IRA.

<<Wouldn't I be better off taking the initial bite now for longer gains down the road and no expenses?>>

Probably, but that depends largely on how you invest the net proceeds after all surrender fees and possible income taxes and penalties have been deducted. Take that number and use your expected rate of return to see what you would have over time in your alternative versus what you would have if you leave the annuity alone. You're the only one who can run those numbers because you're the only one who knows your entire situation.

<<One more question - should I set it up as a reg. IRA or ROTH. (I already have a house so I wouldn't qualify for 1st time homeowners clause.)>>

That all depends on your tax rate today versus that of tomorrow, how you will pay for any taxes due on the conversion to a Roth, how long the money can stay before you take withdrawals, and the size of plus your desires for your estate. You have to run the numbers to see if a traditional or a Roth IRA may be better for you.

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