How do you get out of a Variable Annuity?

[10can]

Talking with some friends and family some of them have Variable Annuities their advisor sold them in their IRA accounts.

They are going to dump their advisor and they want to get their money out of the annuity and move it into an IRA account with someone like Vanguard or Fidelity and just invest the money in mutual funds.

How do you go about doing something like this?

Thanks

[disneysteve]

I think you need to check on the terms of the annuity. Most have a surrender fee that generally decreases each year until it disappears. It may not make sense to cash out the annuity if there is a steep fee to pay. Just hang on until the fee is gone and then get rid of it.

An annuity inside an IRA - pathetic. I don't know how those advisors sleep at night.

[10can]

The annuity is 5 years old and the withdrawal charge is now at 5%.

If you get out of the annuity and go ahead and pay the 5% withdrawal fee can you then transfer the money to a Vanguard or Fidelity IRA without having to pay any income taxes or penalty fees?

It would be bad if you have to pay a 5% fee to the insurance company then a 10% fee for withdrawal before age 59 and 1/2, then pay income tax on the money just to then go and start a new IRA with a fund company.

There has to be a way to quit the annuity and transfer the funds to a fund company and manage the IRA there.

[disneysteve]

Yes, you should be able to get out of the annuity and do a direct rollover to Vanguard (or company of your choice). There shouldn't be an early withdrawal penalty unless you cash out the account.

[10can]

I have been reading over this annuity contract for hours now and these things are nothing but a big scam.

They say they guarantee you 5% but they have 2% or more in expense ratios each year. Add the cost of inflation and you are making nothing on your money. Your money is locked in for at least 10 years or you will have to pay a surrender charge.

I hope someone starts a class action lawsuit against these Insurance Companies for selling these things.

[sweeps]

I have been reading over this annuity contract for hours now and these things are nothing but a big scam.

Practically all variable annuities are scams. If someone tells you otherwise, he's probably trying to sell you one.

[10can]

OK, I have a question.

There is a variable annuity in a Traditional IRA with a current account value of $89,000.

It is 5 years old now so the surrender fee is now at 5%.

Is it wise to pay the $4,450. surrender fee to dump the annuity and then take the balance and invest in some Vanguard Funds?

The stupid annuity has over 2.00% in annual fees and the investment fund that it is in has 1.03% expense ratio while the Vanguard 500 Index Fund has an expense ratio of 0.15% and currently has a 5 year return of 11.18%.

What do you guys think?

[sweeps]

What is the expected 5-year return for the annuity? Also does the surrender fee decline gradually or does it drop abruptly from 5% to 0% after 5 years?

[10can]

The surrender fee will go down by 1% each year.

Not sure what to expect for future fund performance but it shows that the annuity was purchased in December of 2003 for $68,000.

[jasonl417]

You need to run the numbers. There are investment choices inside the Annuity that the client can change into without any penalty. Also a big question is how much guaranteed death benefit are you throwing away. Some annuities offer guarantees that make the extra fees worth it. Do you know what the riders are?

Thanks,

Jason

[jasonl417]

Also what has changed that has made this an inapprpriate investment for the client?

Thanks,

Jason

[noppenbd]

They woke up and looked at what they were actually invested in.

[disneysteve]

Also what has changed that has made this an inapprpriate investment for the client?

A variable annuity inside a tax-sheltered account like an IRA is never an appropriate investment for anyone. Add in the sky high fees most of them charge and all these things do is make a fortune for the salespeople.

[10can]

how much guaranteed death benefit are you throwing away. Some annuities offer guarantees that make the extra fees worth it. Do you know what the riders are?

The latest statement I have is from March 31 2008 and it shows...

Account Balance = $88,537.40
Death Benefit = $95,421.65
Guaranteed Minimum Income Benefit 1 = $95,421.65

Total Purchased Shares = $67,515.69
Total Withdrawals = $0
Net Gain = $21,021.71

[10can]

A variable annuity inside a tax-sheltered account like an IRA is never an appropriate investment for anyone. Add in the sky high fees most of them charge and all these things do is make a fortune for the salespeople.

That is why I am trying to figure out if this thing should be dumped or not.

I found this stat showing how things could be in the long run...

How Fees Impact Return
Value after 35 years, assuming $250 contributed monthly with an 8% average annual return.

(source: Meridian Wealth Management)