Retirement account question

[lefty]

I have a tax deferred annuity funded by payments from my employer. A few years ago they switched us from an IRA w/matching pretax payments to the current plan in which they give me additional income to place in the annuity if I wish (after it is taxed of course). My question(s) is:

1) Can I leave the annuity alone and use the after tax money to start a new Roth IRA instead? Am I restricted in opening another IRA by the existence and availability of the annuity?

2) SHOULD I do this? I hear varying reviews of tax deferred annuities. Is my money better off in a Roth IRA than the annuity?

Any and all comments appreciated.

[kristinecfp]

Hi Lefty,

Yes, you can invest in a Roth IRA, even if you have an employer sponsored retirement plan. However your income must be below $160,000 if you're married, and $110,000 if you're single.

Whether you should do this depends on several things:

1. Will they still provide the additional income you mentioned, if you do not invest it in the tax-deferred annuity?

2. Do they match any of your contributions to the tax-deferred annuity?

3. How good is the annuity? Does it have low or high annual fees? What is the guaranteed rate of return (or is a variable annuity)?

Generally, when you are comparing a non-matching contribution retirement plan to investing in a Roth, you are better off with a Roth. You have better investment selections, lower fees, and you earnings will grow tax free (under current tax law, and assuming that you only take qualified withdrawals).

However, if you are not a disciplined saver, the company sponsored retirement plan allows you to easily sock many away each paycheck.

Hope this helps!
Kristine

[lefty]

Originally Posted by kristinecfp

Hi Lefty,

Yes, you can invest in a Roth IRA, even if you have an employer sponsored retirement plan. However your income must be below $160,000 if you're married, and $110,000 if you're single.

Whether you should do this depends on several things:

1. Will they still provide the additional income you mentioned, if you do not invest it in the tax-deferred annuity?

2. Do they match any of your contributions to the tax-deferred annuity?

3. How good is the annuity? Does it have low or high annual fees? What is the guaranteed rate of return (or is a variable annuity)?

Thanks for the response Kristine. First, my income is too high for a Roth so that is out. My employer provides the additional income for the tax deferred variable annuity but I can do with it what I wish. What they did was end our old 401K w/matching contributions a few years ago. They folded it into the annuity and started paying me additionally to fund it. As for how good the annuity is, I believe it to be low annual fees as compared to others. It is with Fidelity Investments. I do not believe it has any guaranteed rate of return only that it can be no lower than the most I have contributed? Sound right? I have it split among 5 funds and it is doing well if looked at purely from a performance standpoint. I obviously need to learn more about it and feel somewhat foolish because I am now finding out I don't really understand what it is or what is happening/will happen with my money!!

Since the Roth is out due to our income do you know if my wife and I can both contribute to a traditional IRA even though I have the annuity? she has no "qualified pension plan" only several IRA's from past employers.

Again, thanks for the help.

[CRFSaver]

This definately sounds like a question for a qualified lawyer or accountant.

[kristinecfp]

Lefty,

Yes, you can both contribute to traditional IRAs, but the contributions will not be deductible. You're still subject to the annual contribution maximums. Since you don't qualify for the Roth and you won't get the deduction for contributing to a traditional IRA (actually your wife will get a deduction since she does not have an employer sponsored plan), you might consider investing in taxable accounts. With capital gain rates so low, taxable accounts aren't a bad idea. Just allocate your most tax-efficient investments to your taxable account, and your least tax-efficient investments to your retirement accounts.

Good luck!

[lefty]

I have been told by my employer that the Annuity is not a "qualified pension plan" as defined by the IRS so I believe my contributions will be tax deductible. My wife has no current retirment plan with her employer so hers should be deductible as well. $4000 +$500 catch-up contribution for each of us since we are both over 50. I checked on the annuity and it is nothing more than a tax deferred account which will grow until I decide to retire at which time I can elect how I want my money. I'm not sure why they call it an annuity which I have always thought to be an insurance instrument that you purchase that ultimately goes to some sort of guaranteed payment over a particular period of time. According to Fidelity this after tax money just stays in the account until I decide to take it out via lump sum, equal payments, etc. No withdraw requirements until I am (if I remember right) 85 and an IRS penalty if I withdraw before age 59. Seems to me that maxing out the traditional IRA contributions would be first priority with additional cash going in to the annuity a distant second.

[kristinecfp]

Lefty - you are correct. If you are not participating in your employer's plan your IRA contributions would be deductible, because you would not be an active particpant in a qualifed plan.

As for priority of investments, everyone's situation is different, but sounds like you are on the right track.