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Author: numbrel Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: IRAs and Annuities Date: 9/14/2004 10:30 PM
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My parents each have an annuity IRA account (that's an annuity inside an IRA). The current insurance company went bankrupt and now they have to decide what to do with their money. Their current "wealth management" advisor who got them into this mess, wants them to move into annuities with another company.

My Dad is 76, is fighting off pneumonia, and doesn't like to deal with financial stuff in the first place. I am 1,000 miles away, trying to help him by phone. I'm trying to get him to take the money and move it to IRA accounts at Scottrade.

Since the annuities are in IRA accounts, can they just take the money from their annuities and open rollover IRA accounts with Scottrade or any other broker or bank? Tonight, he is stressing over "1035," which he thought was a tax form but I found out is a section of tax code dealing with exchanging annuity contracts. If he doesn't go the annuity route, he doesn't have worry about this, right?

Thanks in advance you can give me.

Barbara

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Author: TMFDj111 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73308 of 121061
Subject: Re: IRAs and Annuities Date: 9/15/2004 12:00 AM
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My Dad is 76, is fighting off pneumonia, and doesn't like to deal with financial stuff in the first place. I am 1,000 miles away, trying to help him by phone. I'm trying to get him to take the money and move it to IRA accounts at Scottrade.

I'm not qualified to address the tax issues you raised in your post, but I'd like to offer my 2¢ worth on your proposed investment strategy.

From the information you offered in your post, your Dad is somewhat elderly, somewhat sickly, and very conservative in his investments. I would suggest that putting him into individual stocks and bonds may not be investments that would allow him to sleep well at night.

If you buy that story, then I would further suggest that your Dad probably would be very comfortable with a CD ladder within his IRA. If you catch him on a day when he's feeling aggressive, he might even be receptive to a 50/50 mix of a stock index fund and a bond index fund.

Bottom line is I urge you to be hypersensitive to your Dad's comfort with your proposed investing strategy. You might be able to argue with your father to adopt an aggressive investment strategy, but if he's not comfortable with with the strategy, then he'll be very receptive to the next cold pitch he hears from someone at church or the child of someone in his social circle. It would be far better for you to help him to develop a strategy that he can sleep with and that he'll stick with.

David Jacobs
TMFDj111

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Author: Tiddman Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73309 of 121061
Subject: Re: IRAs and Annuities Date: 9/15/2004 12:11 AM
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I think it's hard to generalize about annuities because they are complex and come in many varieties. There are fixed and variable annuities, those with and without death benefits, those with and without a provision to pay regular payments until death, etc.

The fee structures vary considerably (though they are usually relatively high as annuities tack additional fees onto the underlying investments, which themselves have fees), and some include a "lockout period" or "early withdrawl penalty" (also known as "surrender charges"). These penalties can be severe, such as 10-20% of assets. Also the tax consequences of distributing or transferring the funds may depend upon whether or not the annuity and its contributions were qualified, and whether or not there has been any growth.

Sorry to blow a bunch of smoke but just saying "annuity" isn't specific enough.

Also you said your dad is 76, which is past the age of mandatory distributions for non-Roth IRA's, so if you do transfer the assets to a rollover IRA, he may have to start taking distributions. Something else to keep in mind.

As one aside, annuities typically carry high fees, and the funds are often invested in instruments with high fees (such as mutual funds with a sales charge). You need to watch these fees, especially if your advisor is telling you to move from one annuity to another. Not to be too cynical, but he probably gets paid every time you transfer your assets, whether or not that is in your best interest.

The 1035 exchange is typically for transferring from one annuity to another. You can Google a bunch of information about these.

I hope that helps a little bit (though I suspect it doesn't).

Randy


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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73310 of 121061
Subject: Re: IRAs and Annuities Date: 9/15/2004 1:40 AM
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I think it's hard to generalize about annuities ...

Agreed, but that's not the issue here. The issue is that the annuity is inside the IRA already. The original poster's dad was sold a "bill of goods" years ago. Holding an annuity within an IRA is a great way to make money... if you're the one selling the annuity. The buyer is paying steep fees to create tax-sheltered growth in a vehicle (the IRA) that's already tax-sheltered.

Ira

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Author: numbrel Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73311 of 121061
Subject: Re: IRAs and Annuities Date: 9/15/2004 9:03 AM
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Thanks to you all for answering.

Bottom line is I urge you to be hypersensitive to your Dad's comfort with your proposed investing strategy.

I am, that's the problem. He wants to be conservative but he is also looking back at the 4.5% to 9% he was getting in the old annuity. He is just not interested in CDs at 2.5%. While I said they have a "wealth manager," they are not wealthy and we are looking at under $90,000 between them, so the CDs wouldn't be large enough to get the higher rates since the money would be divided up in laddered CDs. That is why I am looking at a mutual fund like PRWCX, not flashy but it got through the crash well. And/or some nice 3%+ dividend stocks and I would like to throw some CDs in there as well. He mentioned that the new annuities will be about 3.5% return per year, or at least that's what he thinks and that's what I'm trying to match.

One thing on my side is last night he told me the wealth manager wanted to put my mother into a annuity with Allianz Life Insurance. I looked it up on Standard and Poors, and it has a very poor rating, so I told my Dad. That might help bring him around to the fact that these people are not looking out for my parent's best interest.

Right now, they have a deadline for turning in the paperwork for closing the old annuities and have been given paperwork for the new annuities. The money isn't going to be released until the end of December. I just need to get them to agree not to follow their wealth manager blindly and arrange to get the money out. Then we have time to figure out what to do with it and I will be with them in December.

There was a question about whether the funds are all qualified. They were rolled over from various pension and retirement accounts. What more do I need to find out? They have been taking the mandatory distributions and if any of the funds were not qualified, wouldn't that be recorded on the tax statements from the insurance company?

Thanks for advise. Any other thoughts would be appreciated. I am trying to find a for-fee financial planner near them to help out with this.

Barbara

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Author: TMFDj111 Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73312 of 121061
Subject: Re: IRAs and Annuities Date: 9/15/2004 10:00 AM
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"[My Dad] wants to be conservative but he is also looking back at the 4.5% to 9% he was getting in the old annuity. He is just not interested in CDs at 2.5%. While I said they have a "wealth manager," they are not wealthy and we are looking at under $90,000 between them..."

I feel your pain. My in-laws retired shortly after my wife and I married. My father-in-law worked for the electic utility company as a lineman, and my mother-in-law worked as a secretary. They managed to accumulate a $500,000, mostly cash portfolio after 40 years of full-time work.

When they retired, they decided to seek the advice of a member from their congregation who happened to be a stockbroker. He put them into some flakey investments. A few years later they decided the original stockbroker was a bum, so they moved to another member from their congregation who also happened to be a stockbroker. He put them into different, equally flakey investments. And they repeated this strategy every few years. Over the last 15 years they've managed to turn that $500,000 into $100,000, and now they essentially live on their Social Security benefits and the proceeds of a home equity line of credit.

I've been advising, begging, pleading, and pulling my hair out. My wife was furious with me because I wouldn't MAKE her parents listen to me. At one point she wanted me to take their money away from them, manage it for them, and give them an allowance.

My in-laws never will live in a cardboard box under an overpass -- because I won't allow it. Regretfully I have no good lessons learned to offer from my experience.

I can tell you that there are some so-called 7% guaranteed annuities out there, but the guarantees are not really guarantees, and the annuities are not safe. In the October issue of TMF's Rule Your Retirement newsletter, there's a short article on this subject. The article concludes (now here's a shocker) that annuities are a high cost way to buy poor performance.

If your Dad is determined to replace his failed annuity with another annuity, I suggest you explore the annuities offered by Vanguard, TIAA-CREF, and T. Rowe Price. These three companies offer the lowest cost annuities I know.

I wish you and your Dad the best of luck. I'm sorry that I can't offer you any better suggestions.

David Jacobs
TMFDj111

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73313 of 121061
Subject: Re: IRAs and Annuities Date: 9/15/2004 10:47 AM
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If your Dad is determined to replace his failed annuity with another annuity, I suggest you explore the annuities offered by Vanguard, TIAA-CREF, and T. Rowe Price. These three companies offer the lowest cost annuities I know.

I repeat my earlier statement... IRA money should NOT be invested in an annuity. You're paying a steep fee to gain a "benefit" that you get for free in the IRA itself, tax deferment. The original poster would be better off following his gut and investing in a broad index fund and/or some CDs.

Ira


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Author: Tiddman Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73314 of 121061
Subject: Re: IRAs and Annuities Date: 9/15/2004 10:55 AM
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IRA money should NOT be invested in an annuity. You're paying a steep fee to gain a "benefit" that you get for free in the IRA itself, tax deferment

There are nonqualified annuities, the gains and payouts from which may be taxable, and there may be some benefit to holding them in an IRA.

T


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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73315 of 121061
Subject: Re: IRAs and Annuities Date: 9/15/2004 2:07 PM
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There are nonqualified annuities, the gains and payouts from which may be taxable, and there may be some benefit to holding them in an IRA.

Give me an example, please. To my knowledge, the gains and payouts of all annuities are taxable, the only question is the timing of the tax payment. Generally, tax is deferred until payout. The same is true of an IRA. So why "double shelter"?

Ira


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Author: Tiddman Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 73320 of 121061
Subject: Re: IRAs and Annuities Date: 9/15/2004 6:09 PM
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Give me an example, please. To my knowledge, the gains and payouts of all annuities are taxable, the only question is the timing of the tax payment. Generally, tax is deferred until payout.

Well you got me, because I can't find an example, though detailed prospectuses aren't usually easily available by Google.

But you have a good point, that even nonqualified annuities are typically tax deferred to some extent, and so are IRA's. I can't think of a specific example right now where there is a substantial advantage to having the annuity in an IRA.

Generally I agree with what you implied, that annuities are often sold, with high fees, to people that don't really understand or need them.


T

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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: 73321 of 121061
Subject: Re: IRAs and Annuities Date: 9/15/2004 7:45 PM
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Annuities basically come in two flavors, fixed and variable. In the fixed the company selling the annuity is acting as an insurance company. They won't ask for a physical before selling you the annuity--if you die right after annuitizing, they're way ahead of the game. In the variable, the company is acting like a stockbroker, and selling what amounts to mutual funds with a higher expense ratio.
In 1993 I left a job where I had a significant 401k and considered what to do with the windfall. Roll it into an IRA, of course. That part was easy. Then invest in what?
I considered annuities. First I looked at immediately annuitizing, and found I could get an annuity that would pay me just about what the interest would be on a 30-year treasury. Now, the treasury, at the end of the 30 years, would give me my principal back in a lump sum. With the annuity, there would be no principal back. When I, and perhaps my husband if it would be set up that way, will die, that would be the end of the investment. With the treasury, in another 19 years I will have to make another investment, probably in a lower interest-rate environment than 1993.
Then there are variable annuities. But the expenses are uniformly higher than those of the underlying mutual funds and you have fewer choices. So buy the mutual funds and put them in an IRA and don*t pay an extra fee to the insurance company.
Best wishes, Chris

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