Question: I have an IRA with an insurance company. A man sold it to me years ago, but I haven’t heard from him in years. It has stocks and bonds in it but the papers also say something about an annuity. It’s actually done pretty good these last few years. What do I have and should I keep it?
Answer: It sounds like you own something called a variable annuity. And it further sounds like your variable annuity has been put inside an IRA. Let’s examine this puzzle one piece at a time to see if you’ve got what you need.
First, an annuity is a fixed sum of money paid to someone each year, typically for the rest of their life. If you want such a fixed sum of income guaranteed for life, you typically have to buy it from a life insurance company. For example, a 65-year old man might pay a life insurance company $200,000 in exchange for $1,000 paid to him each month for the rest of his life.
Second, in order to facilitate this purchase, insurance companies came up with the idea of deferred annuities, which allow someone to put regular deposits into the deferred annuity, in hope of building up a sum large enough to turn into one of these lifetime income streams. When it comes time to get a regular income, the deferred annuity is turned into an “immediate” annuity, or one which pays income beginning immediately.
And finally, in hopes of accelerating the growth of deferred annuities, insurance companies came out with “variable annuities.” They are called “variable” because they are allowed to invest your contributions in the stock and bond markets, thereby creating account balances that are no longer stable but variable (aka, going up and down with the markets).
A variable annuity is very, very complex. And it also tends to be very expensive. The investment vehicles inside the product are just like mutual funds, but are known as separate accounts. Each of these has their own internal expense charge. On top of that, the insurance company usually charges something called a “mortality and expense charge.” That’s basically covering their own cost of doing business. And let’s not forget about the surrender charges levied in the early years of the contract designed to discourage you from taking back you money.
What about the fact that your variable annuity is inside an IRA?
On their website, the Securities and Exchange Commission (which has regulatory authority over investments) contains the following language, “… if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) plan or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity’s other features, such as lifetime income payments and death benefit protection.”
Sometimes these products can offer additional benefits that make the additional cost seem worthwhile. These might include a death benefit or a guarantee of future income.
Unfortunately, I’ve seen too many situations where it appeared that the only reason the person had been sold a variable annuity for his IRA, rather than lower cost mutual funds, is that the compensation for the salesperson effecting the transaction was higher. Often much higher.
Find an unbiased advisor you trust who can help you evaluate your own situation. You may find that there is a perfectly good reason to have your variable annuity inside your IRA.
But if you determine that no good reason exists, I would suggest moving the investments in your IRA out of the high cost variable annuity and into an investment that makes better sense for you.
Also, if you find no good reason exists for the variable annuity to be in the IRA, you may want to find a new advisor too.
Byron R. Moore, CFP® is managing director / planning group of Argent Advisors, Inc. Email him at firstname.lastname@example.org. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5800. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.No forecasts can be guaranteed. Argent Advisors, Inc. does not offer tax, insurance or legal advice. The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.