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Author: gemini1 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75839  
Subject: indivdual retirement annunity Date: 10/27/1998 4:26 PM
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Hello..
I am asking this question for my mother in law who is 75...Two years ago , she cashed in a few CD's at her bank and from the advice of the banker ( or whoever she spoke to)&, she opened a IRA Annunity with Dreyfus/transamerica life ins. co.....3/4 of this is in what they call a" guarantee 3 year period" and the other 1/4 is in a growth and income fund..The 3 year portion is only earning 4.5%....She would like me to find some other way to invest this...The money will be for her grandchildren to inherit...I thought that after age 71(?) she had to start withdrawing on an IRA.....Can this be moved or is this an OK investment for her? I think since she is not going to use this money for herself , she should take more risk....Any ideas and how do I go about this?

thanks very much for any advice.....

Debbie
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Author: peppermintpatty Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6318 of 75839
Subject: Re: indivdual retirement annunity Date: 10/27/1998 4:44 PM
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Hi Debbie: First of all, if your mother-in-law put money into an annuity, there will be surrender penalties for early withdrawal. Secondly, the CD's must have been IRA funds in order to transfer them into an IRA/annuity (unless the annuity is actually a "non-qualified" annuity, and no need to make minimum withdrawals after age 70 1/2). As for the 3 year guarantee - it reflects current rates (though it's locked for a bit long...). All in all, if your mother-in-law had idle funds in a CD that only got rolled over each year & she paid taxes on interest earned, and she had no near-term need for the funds, then transferring to an annuity may not have been such a bad idea. It will allow for tax-deferred growth and the funds will pass outside probate to beneficiaries upon the passing of the annuitant. A variable annuity offers many investment choices (fixed interest, growth fund, bond fund, stock index, international stocks, etc.). Read the prospectus completely & ask questions to better understand the product. Good Luck! PP

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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: 6343 of 75839
Subject: Re: indivdual retirement annunity Date: 10/31/1998 12:13 PM
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Gemini1 asked:

<<I am asking this question for my mother in law who is 75...Two years ago , she cashed in a few CD's at her bank and from the advice of the banker ( or whoever she spoke to)&, she opened a IRA Annunity with Dreyfus/transamerica life ins. co.....3/4 of this is in what they call a" guarantee 3 year period" and the other 1/4 is in a growth and income fund..The 3 year portion is only earning 4.5%....She would like me to find some other way to invest this...The money will be for her grandchildren to inherit...I thought that after age 71(?) she had to start withdrawing on an IRA.....Can this be moved or is this an OK investment for her? I think since she is not going to use this money for herself , she should take more risk....Any ideas and how do I go about this?>>

As Peppwemintpatty mentioned, the type of annuity your mom has makes a difference in what she can do. Given her age when she bought it and if it is indeed inside an IRA, then she already is taking minimum required distributions. My bet is she bought a garden variety after-tax annuity in which earnings are allowed to accumulate tax deferred. For now, she can do nothing about the three-year guarantee period without facing severe penalties in the form of surrender charges. Additionally, the tax deferral does allow for build-up of unneeded money which ultimately may go to her heirs. Therefore, and only IMHO, she should leave it alone but take advantage of any investment choices she has within the annuity that will approach or match a market stock index fund return. That will allow for the maximum growth for her grandchildren.

Regards…..Pixy


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Author: BillEuclid Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6369 of 75839
Subject: Re: indivdual retirement annunity Date: 11/2/1998 3:09 AM
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If you are going to purchase stock within the tax-deferred annuity, it will almost surely come out far far FAR worse than if the money had been left as a regular post-tax investment without the tax-deferral.

The reason is that deferring the taxes doesn't make them go away, it just puts them off until she passes and then you have to pay them at the ordinary tax rates.

On the other hand, if you had a post-tax investment, then all of the capital gains earnings would pass tax-free to the heirs. Taxes would only be due on the dividends each year.

Now that the money is already in a tax-deferred annuity, if you want it invested in equities, then the question is, how much can you take out without penalty, and what is the penalty on the rest? Take out all you can without penalty, and do a spreadsheet analysis to see if it is more profitable to pay the penalty on withdrawal so you can get the money into tax-free investments (namely, equities held until they pass at the stepped-up value to the heirs).

Rough example: Say you can invest in equities to double your money in 8 years, besides dividends of 1.5%. Say the amount is $10,000. Then this would double to $20,000, plus have around $2000 in dividends, for a total of $22,000. But there would be annual M&E fees reducing this to around $19,000. And taxes would apply to the $9,000 earnings at death, leaving a net of perhaps $16,000.

BUT if you cash in for a 10% penalty, that leaves you $9,000, which can grow to $18,000, plus roughly $1000 in dividends after taxes are paid from the dividends. That is, you have $19,000 with no taxes due instead of $19,000 with perhaps $3,000 in taxes due.

This is only an example to show how it COULD be advantageous to cash out now. I do not know the specifics of the annuity, so it may or may not be a good idea to cash it out.

Bill


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