Roth IRA/Immediate Annuity

[EconoMutt]

I'd like your opinions on this scenario.

I have a friend that wants to start a Roth IRA.
The financial planner wants him to open an immediate annuity and put it in a Roth.
Does this make sense?

[Robert742]

I'm sure you mean a deferred annuity. Why is the financial planner recommending an annuity for the Roth? What is the benefit?

No, it does not make sense to me. Your friend needs to learn about the basics of investing, or hire a fee-only planner for a 2nd opinion.

Free advice from a financial planner who is really a sales person can be a very expensive mistake. I think your friend's planner is more concerned with getting a commission than giving good advice, but without knowing more about your friend's situation, goals, and risk tolerance, I don't know for sure.

[EconoMutt]

I'm sure you mean a deferred annuity. Why is the financial planner recommending an annuity for the Roth? What is the benefit?

No, it does not make sense to me. Your friend needs to learn about the basics of investing, or hire a fee-only planner for a 2nd opinion.

Free advice from a financial planner who is really a sales person can be a very expensive mistake. I think your friend's planner is more concerned with getting a commission than giving good advice, but without knowing more about your friend's situation, goals, and risk tolerance, I don't know for sure.

Actually, my friend said immediate annuity. That's what threw me.
I associate an immediate annuity with something you would purchase in retirement.

[Robert742]

Actually, my friend said immediate annuity. That's what threw me.
I associate an immediate annuity with something you would purchase in retirement.

An immediate annuity in a Roth makes no sense to me, unless he is converting a large sum of cash from a traditional IRA to a Roth, and I am not sure that makes sense, either.

Is your friend retired and trying to create a stream of cash he cannot out-live? If not, he probably is wrong about it being an immediate annuity.

It is tough to give a friend what may be unwelcome financial advice, but I get the feeling your friend is being talked into doing something he does not understand. Your friend needs to know why an annuity inside a Roth is needed, and your friend needs to get a 2nd opinion from another financial advisor to make sure it is a good idea.

[jpg7n16]

Immediate annuity makes no sense.

Deferred annuity is at least justifiable for a super risk averse client. (though I think personal investing is better for 90%+ of people, super risk averse clients may benefit from that insurance)

But the immediate annuity is crazy. You'd have to turn around and use the annuity payments to invest, defeating the entire insurance of the annuity. (edit: but even still it should be held out of the retirement account, see DS's post below)


I agree with Robert - that sounds so fishy, it had to be comission based.


And there's no way it was any sort of attempting to get more money in this year than the $5k limits allow

From: Publication 590 (2010), Individual Retirement Arrangements (IRAs)

Annuity or endowment contracts. If you invest in an annuity or endowment contract under an individual retirement annuity, no more than $5,000 ($6,000 if you are age 50 or older) can be contributed toward its cost for the tax year, including the cost of life insurance coverage. If more than this amount is contributed, the annuity or endowment contract is disqualified.

[EconoMutt]

An immediate annuity in a Roth makes no sense to me, unless he is converting a large sum of cash from a traditional IRA to a Roth, and I am not sure that makes sense, either.

Is your friend retired and trying to create a stream of cash he cannot out-live? If not, he probably is wrong about it being an immediate annuity.

It is tough to give a friend what may be unwelcome financial advice, but I get the feeling your friend is being talked into doing something he does not understand. Your friend needs to know why an annuity inside a Roth is needed, and your friend needs to get a 2nd opinion from another financial advisor to make sure it is a good idea.

He's only 48.
I agree that he should get a second opinion.

[disneysteve]

The financial planner wants him to open an immediate annuity and put it in a Roth.
Does this make sense?

Absolutely not.

1. This person is not a financial planner. He is a sleazy salesman. He is concerned about one thing and one thing only - his commission. He has no interest in what makes sense for the customer.

2. An annuity is a tax-advantaged investment. Putting it inside of a tax-free account makes absolutely no sense at all and should never be done.

Tell your friend to ignore this guy.

[EconoMutt]

I did get clarification last night.
It is a deferred annuity, not an immediate.

[disneysteve]

I did get clarification last night.
It is a deferred annuity, not an immediate.

Doesn't matter. Putting an annuity inside of a Roth makes no sense.

[Robert742]

I did get clarification last night.
It is a deferred annuity, not an immediate.

Okay, but did you ask your friend why he agreed to fund a Roth with a deferred annuity?

As DS mentioned, it can't be for the tax advantages because Roth IRAs already provide them.

The only reason I can think of for choosing an annuity for a Roth IRA is your friend is extremely risk averse and would not invest in the stock market without a guaranteed return the annuity provides, assuming it is a variable annuity.

Or, it could be an indexed annuity that guarantees little or no loss of principal with a long-term expectation of an 8% annual return. Many people buy these type of annuities not understanding them, and end up disappointed with the actual return.

Annuities are extremely complex, and I doubt your friend knows what he/she is buying. There can be a very long period where a large surrender charge applies, where other investments in a Roth allow you access to your original investment without penalty. Does your friend know about this?

If your friend recently purchased this annuity, I believe there is a free-look period, where he can cancel without penalty.

[EconoMutt]

He has not purchased it yet.
He just asked for my opinion and I told him I could not think of a good reason to do that.
I know he was promised a 3% return and was interested in less risk, like a CD.
I suggested going to a bank and seeing if he could get a CD type investment wrapped in a Roth.

[Robert742]

He might be better off with the annuity because he would have the opportunity to earn more than 3%. Trying to save for retirement at age 48 with CDs will barely keep up with inflation. However, there is no loss of principal through surrender charges on CDs, like there would be with an annuity. Plus, to get the guaranteed 3% from the annuity, he may need to annuitize -- which means he gives the insurance company the lump sum of his account in exchange for a stream of income.

Going with CDs is the safest and simplest option, but the bad news is when he goes to the bank to ask about funding a Roth with CDs, the bank will probably push him toward buying an annuity from them instead.

It would be great if your friend would become more comfortable with risk and fund his Roth with low cost index funds.

[EconoMutt]

He might be better off with the annuity because he would have the opportunity to earn more than 3%. Trying to save for retirement at age 48 with CDs will barely keep up with inflation. However, there is no loss of principal through surrender charges on CDs, like there would be with an annuity. Plus, to get the guaranteed 3% from the annuity, he may need to annuitize -- which means he gives the insurance company the lump sum of his account in exchange for a stream of income.

Going with CDs is the safest and simplest option, but the bad news is when he goes to the bank to ask about funding a Roth with CDs, the bank will probably push him toward buying an annuity from them instead.

It would be great if your friend would become more comfortable with risk and fund his Roth with low cost index funds.

He does invest in mutual funds through his 401k. I think he was just looking for a way to stash some safe extra money for retirement.
Thanks everyone for your responses.