I recently signed up for my first IRA. It turns out that this is a Individual Retirement ANNUITY rather than an Individual Retirement ACCOUNT. When I found out that there was a difference I went to talk to the guy that opened it for me, (life insurance/financial planner at my wife's employer, an insurance company). He told me that it was my best option because I didn't have the down payment for opening an account with some of the larger companies and the low fees and good returns available with the annuity. Just wanted some opinions and advice, how do others feel about this? What would you have done? What would you do now? If you can answer any or all of these questions I'd apprectite it. Thanks, Justin
Just wanted some opinions and advice, how do others feel about this?I would do what I could to get my money back and into a real IRA, spend a little bit of time researching investing, and make a note to myself to not deal with anyone who combines the words 'insurance' and 'financial planner' in their title. The guy wants his commission, and should be regarded as a salesman.It's your money. Be careful with it. If it's a small amount, be thankful that you have been able to learn a very important lesson at relatively small cost.There is tons of info on IRAs and retirement investing here at TMF. Take some time and read some of it.*>UncaMikey
SpiderAnt105,An annuity is probably the insurance company's best option, and probably the salesman's best option, but I doubt it's your best option.What fees are being charged into the annuity? There's usually a flat fee plus a percentage of your balance for insurance, then another percentage of your balance for investment fees.What insurance benefits does the annuity have? In general, due to the insurance, annuities have higher fees and lower returns than mutual funds.There are plenty of "larger companies" that would be happy to open your IRA even with a small initial investment, as long as you regularly add to it. T.Rowe Price and TIAA-CREF come to mind.If I were in your situation I'd gather as much information as possible about the advantages and disadvantages of each. Based on what I know, I'd try to cancel the annuity as soon as possible, and transfer the money to an IRA somewhere else.
I agree with the other posters that you can do better elsewhere. Here are a few questions to ask the salesman (if he won't answer them you should be able to find the answers in the prospectus; if he didn't give you a prospectus he is truly not being up-front with you):- What are the TOTAL expenses associated with this investment? (Anything over about .4 % and you can do a lot better; with Vanguard - although you may not have enough yet for them - you can go as low as .18%.)- What is the M&E (mortality and expense)fee? (This fee is unique to annuities and ANY non-annuity IRA will not have it. The only thing that paying this fee will do is give your heir the higher of a. your total deposits into the annuity or b. the investment value of the annuity if you should die. This is very low risk for the insurance company but very expensive for you.)- If I decide to transfer my money to another IRA in the future, is there any cost for doing so? (Many annuities have exit fees if you withdraw your money - even for deposit in another qualified account. For example, with many annuities, if you move the money to another annuity or to an IRA in the first year, they will keep 5% of your money; 4% in the second year; 3% in the third year. With some companies, the clock restarts every time you add money to the account, so you are always 5 years away from reaching the point where there is no fee. Some annuities even use 7 years/7%.)I think the answers you get to these questions will tell you a lot about annuities and the person you are dealing with.jtmitch
I am going to post a dissenting opinion, or it may be.Find out what the M&E fees are for your IRA, as well as the "investment advisory fees". These may be quoted in different parts of the contract, or even in different documents.No one can really say that annuities are always worse than no-load, low-expense mutual funds, just that it is almost always the case if one is looking for them for investments and not for the insurance part. (Two exceptions that come immediately to mind are TIAA-CREF and Vanguard--both are well known for their low expenses.)If one wants the insurance component (which may guarantee that the beneficiary will receive at least the premiums if they are more than the current balance when the owner dies before annitiizing the annuity--different contracts may specify different levels of insurance), it may be worth it, but quite frankly I personally don't know anyone who has purchased an annuity primarily for that insurance aspect.If you find the annuity expenses (the M&E plus the "investment advisory fees") are more than about 0.3%/yr, you may want to see what you can manage someplace else, such as TIAA-CREF ($250 minimum or $25/mo minimum) or Vanguard ($1,000 minimum whether or not one goes for an "automatic investment plan").Act fast! (Sorry, it smells of a spam when one talks about acting fast, but your time to act may be quite limited.) If you decide to move your IRA out of that annuity to someplace else, you will typically have a brief inspection period to read over the annuity contract, as short as 10 days after receiving the contract or up to a month, but it is usually limited until one starts facing significant surrender charges. (Not all annuities have surrender charges, but the vast majority of them do.) If you fall within that grace period, you may have to act fast to set up a trustee-to-trustee transfer to preserve the sheltering of the money already placed within the IRA. (You have to obey the IRS guidelines for IRA transfers--this is not a "1035 exchange" though the insurance company will probably have a general-purpose form that may mention "1035 exchange" on it, but rather an IRA tranfer.)On the other hand, if what you are in is a low-expense annuity (one of the very few exceptions to high expenses), and you find the terms spelled out in the contract acceptable, you may want to leave your money there.Good luck!
I'd like to thank everyone for their help and advice. It looks like the fees are about 1.4% a year plus an annual policy fee of $40. I've already questioned this guy once about the policy and he was very reasurring but I guess that is his job. I wish I had come here first and I wouldn't have to go back a second time to tell him I want to cancel. Thanks again.Justin
You shouldn't need to tell him, because he will just talk you out of it. There should be a procedure for cancelling the annuity before the fees kick in and getting your IRA money back to cash; you need to follow it.Just make sure you're still in the "look-it-over" period, and do an IRA transfer to another institution.
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