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An IRA and a Variable Annuity

Chris Farrell Mar 31, 2008

Question: I’m 61 and will work until 65 or 66, unless my employer decides otherwise. My financial advisor is recommending that I put my IRA into a variable annuity for about 4 years, as I can get a guaranteed 5% return if the Market goes down and a better return if it goes up. The fees of the annuity plus the 1.3% fee the advisor is charging now would raise the annual management fee to 2.8%. I ran the numbers and his suggestion makes seems to make sense if the Market does go down for the next 2 years or more and I start taking money out at retirement.

The IRA is about 37% of my current retirement savings, I’m putting 19% of my income into my 401K at work, and pension and social security are expected to replace ~34% of my current income (no adjustments for inflation) if I stay employed until 66. Does a variable annuity make sense for me? Gary, Omaha, NE

Answer: I can’t stand this tactic. The fundamental reason I dislike it is that an IRA is a tax sheltered account. A variable annuity is also a tax sheltered account. Therefore, you’re wasting valuable tax shelter with this maneuver–and taking on huge fees at the same time.

The Financial Industry Regulatory Authority (FINRA), is the largest non-governmental regulator for all securities firms in the U.S., overseeing more than 5,000 brokerage firms, about 172,000 branch offices and more than 676,000 registered securities representatives. It periodically issues “Investor Alerts” and one was on variable annuities. In its typically cautious language, here’s what FINRA has to say about the recommendation to mix together a variable annuity and an IRA:

“Investing in a variable annuity within a tax-deferred account, such as an individual retirement account (IRA) may not be a good idea. Since IRAs are already tax-advantaged, a variable annuity will provide no additional tax savings. It will, however, increase the expense of the IRA, while generating fees and commissions for the broker or salesperson.”

You can read the whole investor alert at It’s called “Variable Annuities: Beyond the Hard Sell.” The bottom line: Don’t do it.

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