Annuity Versus Rollover into Roth IRA

[lionnv]

I am a Federal employee. I participate in a program called the voluntary contributions program (VCP). Under the VCP, I am able to contribute post tax dollars to a fund which is currently returning around 2.5% per annum.

At the time of retirement, I will be able to take my VCP account and (1) roll it into a Government annuity, or (2) a Roth IRA.

The only portion of the annuity which will be taxable is the amount of the annuity associated with the earnings on my contributions. Likewise, the only taxable portion of the rollover to a Roth IRA would be on the earnings on my contributions.

I plan to have around $300,000 in post tax contributions at the time of retirement. I will be 66 years of age at that time. The rate on the annuity is 9%. This would result in an annual Government annuity of $27,000 in perpetuity.

How does this annuity stack up against a rollover of $300,000 in post tax contributions into a Roth IRA.

[disneysteve]

How old are you now? If you are years from retirement, why are you contributing to an account paying 2.5% rather than investing that money on your own in a Roth?

Also, the 9% quote for the annuity is based on today's rates. Unless you are very close to retirement, there is no way to know what the rate will be when you retire in 10 or 20 or 30 years.

If, on the other hand, you are close to retiring, you really need to look at the terms. What happens to the annuity when you die? Are there survivor benefits? You don't want to put 300K into the annuity, die a few years later and have your spouse or heirs get nothing. With the Roth, the money would pass to your beneficiary.

That said, opening a Roth when you are 66 may or may not make sense depending on your overall financial picture and what the rest of your portfolio looks like and how you will be funding your retirement. We'd need a lot more info to discuss if that is a good idea.

[Petunia 100]

In general, I am not a fan of annuities. However, a government annuity may be an exception. If the government is underwriting the costs, it may be an excellent deal. In order to make a good decision, you should really find out exactly how the annuity works. You also want to know if the annuity payments will be taxable or tax free. The Roth withdrawals will be tax free.