No. of Recommendations: 1
Since I've earned wages in 2000, can't I technically cash out the annuity and legally use my earned wages for the Roth IRA (and the annuity money for other expenses)?
Yes! I couldn't tell from your first post if you had any income or not.

Thanks for the tip on transferring providers. Do I still have to pay taxes if I transfer my annuity?
No taxes as long as the 1035 form is filed with the IRS properly. (The new annuity provider will tell you how to do that.)

If I transfer the annuity to another provider, do you think it's worth saving the fees but forego the benefits of having any money invested in an IRA for 2000?
I don't know! Usually the question people ask is "If I transfer now to a better annuity, how long will it be before the investment gains overtake the fees?" If you were asking that, I would run a calculation and give a guesstimate. But that's not what you're asking.

Like the Roth IRA, an annuity is also a tax-privileged retirement arrangement. I wouldn't recommend raiding one retirement account and paying a severe penalty in order to fund another retirement account. Roth IRAs are good, but don't go into debt to contribute to one. YOu have to raise your income and/or reduce your expenses.

- Money in annuity
- When you retire & take withdrawals, part of each payment will be tax-free; the rest will be taxed as income
- Would pay surrender charge to transfer to another provider
- Would pay surrender charge, tax, and penalty to cash

What you're thinking:
Cash out the annuity and open a Roth IRA with the proceeds
- Pay tax on whatever gains there are (25%(?) of 3(?) years of interest compounded at 5%(?) -- approximately 4% of account value )
- Pay penalty for an unqualified withdrawal (another 10%)
- Pay surrender fee (another 7%(?) )
- So you'd end up with about 80% of your annuity's present value. You'll only be able to put $4000 of it into a Roth IRA. With a Roth IRA, when you retire and take withdrawals, each payment will be tax-free.

A lot comes down to what the surrender fee is. If the surrender fee is 2%, but next year it will be 0%, it might be better to wait.

If I were in this situation, I would transfer the annuity (tax-free) to another provider with better products, no matter what the surrender fee. I would look for places to cut back on my spending so I would be able to contribute at least a few hundred to my IRA -- maybe even ask friends or relatives for a loan.
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