Q. I have a variable annuity since 2011. It’s a traditional IRA but I wonder if I should transfer it out for something with fewer fees and a better return. It’s probably only 5% of my portfolio and it’s invested half in stocks and half in bonds.
A. Thanks for your question.
A variable annuity is a contract between you and an insurance company.
You make a lump sum or a series of payments and choose from a list of investments, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.
He said the insurance company makes payments to you during your retirement depending on how the investments you select perform.
“Variable annuities are tax deferred and you only pay taxes on income and capital gains when you withdraw funds, however you will be paying ordinary income taxes, not the favorable capital gains tax,” Panambur said. “Of course, if you hold the variable annuity in a traditional IRA, then you lose the additional tax benefit.”
Typically, he said, variable annuities have several costs associated with them such as mortality and expense charges, account fees, investment management fees, administrative fees and charges for any unique feature that the annuity may have.
In addition, annuity contracts have exclusions and limitations.
“You must evaluate all these to make sure they are reasonable,” he said. “You must also review the investments in the variable annuity to see if they have performed well, net of all fees. Other factors you must consider are your age, risk profile and liquidity needs.”
If you are convinced of the value of the annuity, you must then see if it sits well with the rest of the portfolio and adds any benefit, he said. If not, you may want to replace it with some other investment.
“Many variable annuities have a surrender charge especially in the earlier period and your decision to liquidate the annuity should take that into account,” Panambur said. “If you decide not to liquidate the annuity, you may also have the choice to change the investment mix so that it is in line with your situation and objectives.”
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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.