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This is a tangent from an earlier thread today about annuity 1035 transfers. TIAA-CREF has Rollover IRA accounts which, like many of their products, live inside of a low cost variable annuity. Does that mean that one of these Rollover IRAs can only be rolled to another annuity Rollover IRA ("once an annuity always an annuity")? Or, as a Rollover IRA, can it be rolled to a non-annuity Rollover IRA in the future? I would appreciate any clarification.

jtmitch
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I'm not sure you have the order right.

An IRA can never be put inside anything else. Assets are put inside an IRA, not vice versa.

TIAA-CREF lets you buy an annuity inside an IRA (rollover, traditional, or Roth). But since a) this annuity has no surrender fees, you can convert it to cash at any time and just do a plain rollover to some other IRA custodian. Since it's inside an IRA, there are no tax considerations about converting it to cash.

There's no such law as "once an annuity always an annuity." It's just that the annuity issuer usually has big surrender fees making it impractical to cash in, and outside of an IRA the government imposes excise taxes on annuities used before the appropriate age.

WARNING! An annuity in an IRA is usually an awful idea because both the annuity and the IRA provide tax deferral. Most insurance companies charge a hefty fee for their annuities because people like the tax deferral. TIAA-CREF is one of the rare exceptions that charges reasonable fees for its annuities -- so reasonable that it makes sense to put them in an IRA.
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TIAA-CREF lets you buy an annuity inside an IRA (rollover, traditional, or Roth)

Good clarification. I indeed thought is was the other way around.

There's no such law as "once an annuity always an annuity." It's just that the annuity issuer usually has big surrender fees making it impractical to cash in, and outside of an IRA the government imposes excise taxes on annuities used before the appropriate
age.


I should have been clearer; I meant "once an annuity always an annuity before 59.5 unless you are willing to put up with bad things like 10% penalties and the like."

An annuity in an IRA is usually an awful idea because both the annuity and the IRA provide tax deferral. Most insurance companies charge a hefty fee for their annuities because people like the tax deferral. TIAA-CREF is one of the rare exceptions that charges reasonable fees for its annuities -- so reasonable that it makes sense to put them in an IRA.

I agree.

Thanks/jtmitch
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I meant "once an annuity always an annuity before 59.5 unless you are willing to put up with bad things like 10% penalties and the like."

Unfortunately, "Annuity" has several meanings, and that can confuse the picture.

One can purchase an "unqualified" annuity with after-tax dollars, and it can grow tax deferred. There is no limit on how much one can put in to such an instrument. In this case, yes, there are income tax and 10% penalty to take money out before one is 59.5. What that annuity invests in can be one of various accounts, such as a "guaranteed interest" account, or various investment accounts, sometimes based on publically available mutual funds (but with the Annuity wrapper), sometimes based on in-house investments that work similar to mutual funds but are proprietary to that particular issuer.

An IRA is another account type. It can invest in stocks, stock funds, annuities (including variable annuities), CDs, or money market account or money market fund. Once the money is in an IRA, it is always in an IRA, with specific exceptions, until one is 59.5 years old. (I am brushing aside a lot of details for simplicity sake.) Even if you have an IRA invested in a variable annuity with one custodian, you can still transfer the money in that IRA to another IRA custodian and invest in something else (e.g., from an insurance company's IRA in annuities to a fund family's mutual funds) without paying tax nor federal penalty. (I am acutally taking a lot of liberty here. Typically, upon separation from service, one can typically elect to transfer a 401(k) or 403(b) to a "rollover IRA" and potentially roll it into a future employer's 401(k) or 403(b), respectively, but while it is in the "rollover IRA" it can be invested even in insturments not allowed by a 403(b), such as individual stocks.)

A 403(b) is yet another account type. The old name is "Tax Sheltered Annuity" but it can be invested in mutual funds as well as annuities. (403(b)1 allows annuities as investments; 403(b)7 allows mutual funds as investments.) Again, even if the money within the 403(b) is invested in annuities, one may be able to transfer to another custodian that allows investing in mutual funds, again without tax nor federal penalty.

So when one says "Annuity", one really needs to know if one is talking about an Unqualified Annuity (in which case it has to remain within the annuity wrapper until one is 59.5 or suffer tax and 10% federal penalty), or if one is referring to one of the other account types (IRA, Roth IRA, 401(k), 403(b)) that just happens to invest in annuities, among other possibilities.

Believe me, the same types of distinctions have to be made when people talk of mutual funds--the "mutual fund" label applies to the investment type, but not what kind of account holds that investment, and tax and penalty laws depend on the account type (regular account, IRA, Roth IRA, 401(k), 403(b)7, etc.), not the investment type.

If this confuses you, think of a personal (taxable) account, unqualified annuity, 401(k), 403(b), IRA, Roth IRA as types of boxes, and think of mutual funds, annuities (including variable annuities), CDs, money market funds, and money market accounts as possibilities of what can go inside the box. (Not all boxes can hold all types of investments.)

As you can see, "Annuity" (unqualified annuity, tax sheltered annuity) can refer to the box or (401(k), 403(b), IRA, Roth IRA) to the contents of the box.
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jrr7 -

You're surely welcome to your opinions, but I just wonder about your overall knowledge about tax regs & specific investment product details when you are so liberal with your advise!

Your love for Vanguard & TIAA-CREF is noted. They are both good companies. TIAA-CREF has enjoyed lower operating expenses over the years because of their non-profit status.

Finally, an annuity in an IRA is not necessarily any AWFUL idea! One might decide to do that to use the guaranteed fixed interest account that pays a higher yield on deposits of a very conservative investor. It's not my favorite recipe, but it is appropriate for some people!

Keep an open mind. Regards, PP
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Mark --

Thanks; great explanation as summarized by:

As you can see, "Annuity" (unqualified annuity, tax sheltered annuity) can refer to the box or (401(k), 403(b), IRA, Roth IRA) to the contents of the box.

As I noted in an earlier response, there was confusion in my mind between the "box" and the "contents". Your explanation has helped alot.

jtmitch
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I'm glad something of my message made sense--last week there was a virus going around work and I caught it (no, not a computer virus, a cold-type virus), and I have been under the weather all this week.
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