Be Careful About Annuities in IRAs

23 Sep

Ever since their inception back in 1982, IRAs have been offered by virtually every type of financial institution, from banks to brokerage firms to insurance companies. They are, in fact, the only possible avenue available for many retirement savers who do not have access to corporate or self-employed plans. Virtually any type of investment can be used inside an IRA, with the exception of life insurance, commodities futures, collectibles, and some kinds of coins.

However, just because an investment is permissible within an IRA does not necessarily mean that it is beneficial. There has been much debate over whether annuities are appropriate retirement investment vehicles inside IRAs, or any other type of tax-deferred retirement plan for that matter. The main argument against doing this is obvious: why put an investment that is already inherently tax-deferred inside of an account or plan that is also tax-deferred? Because, of course, there is no such thing as “double” tax-deferral; money that has been deferred from taxation once cannot be deferred again! Yet a great many insurance companies and agents enthusiastically promote annuities within IRA accounts.

The insurance industry would be quick to respond that investors seeking guaranteed rates of return will get higher yields from fixed annuities than other vehicles offering similar risk. The industry might also point out features such as the ability to annuitize or a 10% annual withdrawal feature that does not exist in other fixed income alternatives. In the case of variable annuities, they offer a range of insurance and money-management features that are not included in other investments. Options such as periodic portfolio rebalancing, systematic investment plans, and living and death benefits are standard features in all modern variable annuity contracts. The asset allocation features normally found in these contracts can generally only be matched by professional money management firms, which can be inaccessible for most IRA or other retirement plan participants.

In other words, there is more to an annuity than tax deferral. Consider the entire range of benefits that any opportunity offers and do not judge it on one single feature. Do keep in mind that variable annuities are subject to insurance-related costs (mortality and expenses) and investment management fees associated with the underlying investments.

The best way to decide if a variable annuity makes sense in your IRA is to see a side by side comparison with the mutual funds that match the variable annuity sub-accounts.  Ask your retirement consultant for a spreadsheet comparison.

Post provided by Javelin Marketing

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