Benefits of Using an Annuity to Fund an IRA

[Norwayguy]

Most annuities have a minimum to invest in them.

True but there are plenty of flexible premium annuities allow an ACH payment of $50 or $100 per month and the guaranteed minimum interest rate should blow away an IRA CD from most banks not even counting whatever current interest rate or bonus might be included.

 

[scagnt83]

It's a friend of mine, thinks it will be easier and a better bet to have an mmf/bank cd etc. as his roth funding vehicle. He thought about going to the bank to open one up.

If it were a friend I would be very blunt. And tell him that he might as well put it under the mattress, because the 0.5% he will get in a MMF isnt worth the effort to drive to the bank.


While it might be "easier" (ie: requires no thought at all), if he is serious about saving for retirement then he should at least give it a tiny bit of effort.


And it most certainly is not a "better bet". There are tons of FAs out there that will GUARANTEE a higher return.


But if he is young I would also show him an uncapped IA, such as the ANICO Value Lock 7 or 10, or Anexxus BAA.
Not only will it GUARANTEE more than the MMF, but it will give him the chance of a higher return too.

It really should be a no brainer unless he just does not care. (which could be very possible at a young age)

 

[Rick.S]

Good answer, scant83. The only other thing I would add is the effect of inflation on the friends retirement savings. For the past few years the return on MM's have remained well below the rate of inflation and no change to this relationship is predicted in the foreseeable future. The prices for goods and services are increasing at a rate that exceeds the return on investments held in MM's. So the longer the money sits in a MM, the less it will buy when the investor retires. The younger the investor, the more significant the loss of buying power during retirement.

Emptyeternity - You did not mention the source of the funds your friend wishes to invest. If this is a roll over from a 401(k) or similar retirement vehicle into an IRA than an annuity inside the IRA is just one of the options for your friend. However, if this is "new" money you should never recommend funding an IRA and then purchasing an annuity inside.

A non-qualified annuity contains all of the tax advantages and the choice of guarantees that would cause the buyer to own the product without placing it within a qualified plan. The only thing that funding an IRA with new money and then purchasing the annuity within the IRA brings is the additional fees charged for the maintenance of the IRA.

The only time an annuity should be considered inside an IRA is when a client has money that is already held in a tax qualified investment vehicle and is looking for the additional guarantees that may be available in no other way than via the purposed annuity. Under any other circumstance the customer is adding fees with no added value to the purchase.

Advice to all - if you are not fully licensed to provide advice on investments you are on thin ice if you are counseling your customer/client/friend on retirement investment vehicles. There are cases in the courts right now that are addressing the question of what constitutes "investment advice" when it comes to fixed verses variable investments and other retirement related investments.

For example: An individual who is licensed to sell life and health insurance in a given state can legally discuss and sell fixed annuities but is not licensed to provide advice on or sell registered or variable investments.

During their discussions the agent suggests to the customer that they should consider a fixed annuity rather than a variable annuity because the variable annuity may represent more risk than the fixed annuity. The customer agrees and purchases the fixed annuity based on this information. By discussing the risk inherent to a variable annuity has the agent, in fact, provided investment advice that is beyond the scope of their training and licensing? If the market sustains a long upward movement and the customer files a complaint stating he/she was harmed because the agent downplayed the variable annuity in favor of the underperforming fixed product what could/should the repercussions be on the agent?

Should the recommendation someone NOT PURCHASE a registered, variable investment in favor of a non-registered, fixed product carry the same requirements and consequences that come with the recommendation TO PURCHASE a registered, variable investment. Is the advice being given based on what product the agent can or cannot be paid on rather than what is most suitable to the needs and preferences of the customer/client?

Look for the answer soon to be coming out of a congressional sub-committee near you.

My recommendation is that you refer your friend to a someone who is properly licensed to discuss the full range of investment products for retirement. You will be doing both of you a favor. Then go and get your Series 65 and only then attempt to take your friends account back into your book of business.

 

[scagnt83]

However, if this is "new" money you should never recommend funding an IRA with new money and then purchasing an annuity inside.

An non-qualified annuity contains all of the tax advantages and the choice of guarantees that would cause the buyer to own the product without placing it within a qualified plan. The only thing that purchasing the annuity within an IRA brings in this case is the additional fees charged for the maintenance of the IRA.

The only time an annuity should be considered inside an IRA is when a client has money that is already held in a tax qualified investment vehicle and is looking for the additional guarantees that may be available in no other way than via the purposed annuity. Under any other circumstance the customer is adding fees with no added value to the purchase.

Actually you are incorrect.

Are you a 65???

Many Insurance Companies (most) do not charge maintenance fees for an Annuity in an IRA.

So there are usually no extra fees incurred, unless they are associated with the Annuity itself.

If its on ACH then they might charge a tiny transaction fee. But many do not.

Like I said, Its about the features of the savings vehicle and how they relate to the goals of the client.

If the client went with Registered Funding Vehicles, they would have much higher fees than any Fixed Annuity or most any Indexed Annuity.


Now if he had a different institution as Custodian, and then bought an Annuity, that Custodian would collect a needless fee since the Insurance Company will do the same thing for free.



Also, you are forgetting the Tax Deduction aspect of the situation.
The reason someone would fund a new money IRA w/ an Annuity instead of just purchasing the Annuity on its own; is to get the yearly Income Tax Deduction!!!!

 

[Newby]

Good answer, scant83. The only other thing I would add is the effect of inflation on the friends retirement savings. For the past few years the return on MM's have remained well below the rate of inflation and no change to this relationship is predicted in the foreseeable future. The prices for goods and services are increasing at a rate that exceeds the return on investments held in MM's. So the longer the money sits in a MM, the less it will buy when the investor retires. The younger the investor, the more significant the loss of buying power during retirement.

Emptyeternity - You did not mention the source of the funds your friend wishes to invest. If this is a roll over from a 401(k) or similar retirement vehicle into an IRA than an annuity inside the IRA is just one of the options for your friend. However, if this is "new" money you should never recommend funding an IRA and then purchasing an annuity inside.

A non-qualified annuity contains all of the tax advantages and the choice of guarantees that would cause the buyer to own the product without placing it within a qualified plan. The only thing that funding an IRA with new money and then purchasing the annuity within the IRA brings is the additional fees charged for the maintenance of the IRA.

The only time an annuity should be considered inside an IRA is when a client has money that is already held in a tax qualified investment vehicle and is looking for the additional guarantees that may be available in no other way than via the purposed annuity. Under any other circumstance the customer is adding fees with no added value to the purchase.

Advice to all - if you are not fully licensed to provide advice on investments you are on thin ice if you are counseling your customer/client/friend on retirement investment vehicles. There are cases in the courts right now that are addressing the question of what constitutes "investment advice" when it comes to fixed verses variable investments and other retirement related investments.

For example: An individual who is licensed to sell life and health insurance in a given state can legally discuss and sell fixed annuities but is not licensed to provide advice on or sell registered or variable investments.

During their discussions the agent suggests to the customer that they should consider a fixed annuity rather than a variable annuity because the variable annuity may represent more risk than the fixed annuity. The customer agrees and purchases the fixed annuity based on this information. By discussing the risk inherent to a variable annuity has the agent, in fact, provided investment advice that is beyond the scope of their training and licensing? If the market sustains a long upward movement and the customer files a complaint stating he/she was harmed because the agent downplayed the variable annuity in favor of the underperforming fixed product what could/should the repercussions be on the agent?

Should the recommendation someone NOT PURCHASE a registered, variable investment in favor of a non-registered, fixed product carry the same requirements and consequences that come with the recommendation TO PURCHASE a registered, variable investment. Is the advice being given based on what product the agent can or cannot be paid on rather than what is most suitable to the needs and preferences of the customer/client?

Look for the answer soon to be coming out of a congressional sub-committee near you.

My recommendation is that you refer your friend to a someone who is properly licensed to discuss the full range of investment products for retirement. You will be doing both of you a favor. Then go and get your Series 65 and only then attempt to take your friends account back into your book of business.

What if he doesn't want to invest the money at all? He may just want it in an indexed annuity. Happens all the time.

 

[Justin Bilyj]

But if he is young I would also show him an uncapped IA, such as the ANICO Value Lock 7 or 10, or Anexxus BAA.
Not only will it GUARANTEE more than the MMF, but it will give him the chance of a higher return too.

It really should be a no brainer unless he just does not care. (which could be very possible at a young age)

I thought the BAA was a single premium annuity or else I would, I love the uncapped/fixed idea. With no riders on it, it should be competitive.
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Emptyeternity - You did not mention the source of the funds your friend wishes to invest. If this is a roll over from a 401(k) or similar retirement vehicle into an IRA than an annuity inside the IRA is just one of the options for your friend. However, if this is "new" money you should never recommend funding an IRA and then purchasing an annuity inside.

A non-qualified annuity contains all of the tax advantages and the choice of guarantees that would cause the buyer to own the product without placing it within a qualified plan. The only thing that funding an IRA with new money and then purchasing the annuity within the IRA brings is the additional fees charged for the maintenance of the IRA.

The only time an annuity should be considered inside an IRA is when a client has money that is already held in a tax qualified investment vehicle and is looking for the additional guarantees that may be available in no other way than via the purposed annuity. Under any other circumstance the customer is adding fees with no added value to the purchase.

Advice to all - if you are not fully licensed to provide advice on investments you are on thin ice if you are counseling your customer/client/friend on retirement investment vehicles. There are cases in the courts right now that are addressing the question of what constitutes "investment advice" when it comes to fixed verses variable investments and other retirement related investments.

For example: An individual who is licensed to sell life and health insurance in a given state can legally discuss and sell fixed annuities but is not licensed to provide advice on or sell registered or variable investments.

During their discussions the agent suggests to the customer that they should consider a fixed annuity rather than a variable annuity because the variable annuity may represent more risk than the fixed annuity. The customer agrees and purchases the fixed annuity based on this information. By discussing the risk inherent to a variable annuity has the agent, in fact, provided investment advice that is beyond the scope of their training and licensing? If the market sustains a long upward movement and the customer files a complaint stating he/she was harmed because the agent downplayed the variable annuity in favor of the underperforming fixed product what could/should the repercussions be on the agent?

Should the recommendation someone NOT PURCHASE a registered, variable investment in favor of a non-registered, fixed product carry the same requirements and consequences that come with the recommendation TO PURCHASE a registered, variable investment. Is the advice being given based on what product the agent can or cannot be paid on rather than what is most suitable to the needs and preferences of the customer/client?

Look for the answer soon to be coming out of a congressional sub-committee near you.

My recommendation is that you refer your friend to a someone who is properly licensed to discuss the full range of investment products for retirement. You will be doing both of you a favor. Then go and get your Series 65 and only then attempt to take your friends account back into your book of business.

This is new money. And yes I understand the difference between offering investment advice, and no I never recommend against a current investment strategy or future, I just show them the options and let them choose.

 

[DHK]

If he wants the contribution to COUNT for the 2012 tax year, then putting it in a LIQUID money market account IRA at the bank is the FASTEST way of getting it done... considering it's April 14th today.

Once the contribution is made for the 2012 year, then it's easy to move the funds to whatever he wants.

 

[scagnt83]

I thought the BAA was a single premium annuity or else I would, I love the uncapped/fixed idea. With no riders on it, it should be competitive.
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Im not really sure if its single premium only or not. Just throwing that out there as a more appropriate product for a young person.

There are a couple of carriers that will allow (or used to allow) young people on Income Riders. AE was one. They would issue the no charge rider for any age if I remember correctly.

Since he is very conservative, show him a true guarantee.

Or, as DHK suggested. Let him start with the bank first and then move it over later.

 

[Tahoe Ray]

Im not really sure if its single premium only or not. Just throwing that out there as a more appropriate product for a young person.

There are a couple of carriers that will allow (or used to allow) young people on Income Riders. AE was one. They would issue the no charge rider for any age if I remember correctly.

Since he is very conservative, show him a true guarantee.

Or, as DHK suggested. Let him start with the bank first and then move it over later.

Still correct. Age 40 is where you'll see more carriers enter the market...at 50 you'll have almost everyone (speaking specifically to the riders).

 

[Justin Bilyj]

So if someone already has a mutual fund within a roth ira, but is unsure about the risk and wants to see other ideas (he's also very young but pours 500 a month into it), is there a way somehow to rollover the funds in his mutual funds into an annuity whether its indexed or fixed, without making it a taxable event? I know 1035 is only for likeness, wasn't sure if there were special withdrawal events etc. or other ways.
Appreciating all the great feedback!

Where's Larry at?