Skip to main content
No. of Recommendations: 0
Inspired and encouraged by what I've read at the Motley Fool, I am finally taking charge of my investments (and my retirement) at the age of 51. I have two non-qualified annuities which I purchased five years ago. I thought they were doing pretty well (15% average returns per year) until I compared them to my IRA mutual funds, which have averaged over 20% per year. I want to cash in the annuities and invest the proceeds myself. I worry that I'm too old and too close to retirement to do this, but figuring in the taxes I would pay (28%) and the 10% penalty plus surrender charges, I think I would still come out ahead in 10 or 12 years if I invest the money myself in Foolish Four and Cash King stocks. I don't have any retirement plan or pension funds through my work; the funds in these annuities and my IRAs will be my main source of retirement income. I want to do this not only for my own retirement but also for my heirs. I have read that the tax liability on annuities would be much greater for my children than if the money were in an index fund or stocks.
Is my thinking on target or am I kidding myself? Does this sound like a good plan? I just wish the Motley Fool had been around when I was 25 or 30!! Thanks for any suggestions or help!
Print the post Back To Top
No. of Recommendations: 0
Greetings, MtnFan. You asked:

Inspired and encouraged by what I've read at the Motley Fool, I am finally taking charge of my investments (and my retirement) at the age of 51. I have two non-qualified annuities which I purchased five years ago. I thought they were doing pretty well (15% average returns per year) until I compared them to my IRA mutual funds, which have averaged over 20% per year. I want to cash in the annuities and invest the proceeds myself. I worry that I'm too old and too close to retirement to do this, but figuring in the taxes I would pay (28%) and the 10% penalty plus surrender charges, I think I would still come out ahead in 10 or 12 years if I invest the money myself in Foolish Four and Cash King stocks. I don't have any retirement plan or pension funds through my work; the funds in these annuities and my IRAs will be my main source of retirement income. I want to do this not only for my own retirement but also for my heirs. I have read that the tax liability on annuities would be much greater for my children than if the money were in an index fund or stocks.
Is my thinking on target or am I kidding myself? Does this sound like a good plan? I just wish the Motley Fool had been around when I was 25 or 30!! Thanks for any suggestions or help!


I can't tell you whether or not your idea is the best course of action in your situation without knowing one heck of a lot more about your comfort level towards investing yourself, your personal financial situation, and your willingness to absorb the risks inherent in individual stock trading. If you have examined the impacts of surrendering your annuities thoroughly (and you seem to have done so) and you have concluded that after taxes, penalties and surrender fees you can still come out ahead in another investment, then financially the move makes sense.

Your understanding of the tax impact on an after-tax annuity to heirs versus that of inheriting securities is correct. In the annuity, your heirs will pay ordinary income tax on the amount received over and above your cost basis in that annuity. OTOH, if they inherit securities you hold in a taxable account (NOT an IRA or retirement plan), then they owe no tax. That's because they receive a stepped-up basis on those shares equal to the market value on the day you die. Any gain on a subsequent sale is calculated on the difference between that market value and the ultimate selling price.

And BTW … I wish TMF had been around some years back as well. I sure could have done a lot of things differently had that been the case.

Regards….Pixy

Print the post Back To Top
No. of Recommendations: 0
Gut reaction, not facts and figurs. I would tend to be conserative and not make the switch if it depended on a 20% return or you want to retire early. If you can make the numbers work on a 10% return and know you will work or not need the money for more that 10 years I would consider it. Check your taxes to see if you should conver one annuity this yeatr and one next year.

" Inspired and encouraged by what I've read at the Motley Fool, I am
finally taking charge of my investments (and my retirement) at the age
of 51. I have two non-qualified annuities which I purchased five years
ago. I thought they were doing pretty well (15% average returns per
year) until I compared them to my IRA mutual funds, which have
averaged over 20% per year. I want to cash in the annuities and invest
the proceeds myself. I worry that I'm too old and too close to retirement
to do this, but figuring in the taxes I would pay (28%) and the 10%
penalty plus surrender charges, I think I would still come out ahead in
10 or 12 years if I invest the money myself in Foolish Four and Cash
King stocks. I don't have any retirement plan or pension funds through
my work; the funds in these annuities and my IRAs will be my main
source of retirement income. I want to do this not only for my own
retirement but also for my heirs. I have read that the tax liability on
annuities would be much greater for my children than if the money
were in an index fund or stocks.
Is my thinking on target or am I kidding myself? Does this sound like a
good plan? I just wish the Motley Fool had been around when I was 25
or 30!! Thanks for any suggestions or help!"
Print the post Back To Top
No. of Recommendations: 0
Thank you, rjm1cc, for the advice--which sent me back to my calculator. I'm trying to cover all the possible situations and I appreciate the input!
Print the post Back To Top