While on the subject of annuities this week, here’s another doozey I come across every so often: The IRA Annuity.
As you know, an IRA is a tax-deferred investment vehicle and so is an Annuity. In my advisor practice I find that, occasionally, a new client comes aboard and his portfolio contains one of those rarities.
If you ask your accountant or tax preparer, he will tell you that an IRA Annuity absolutely makes no sense (unless, he happens to be selling these) from a tax stand point.
If that’s the case, how do investors end up with them?
I got the answer many years ago when my wife (an accountant) was conducting an IRS audit for a client.
I was able to sit in for a portion of the audit dealing with investments, and I asked the auditor about IRA Annuities. He laughed and said that they were simply another tool for someone to generate an up front commission. Other than that, they made no sense at all.
So, if you’re being approached about moving your IRA into an Annuity, be warned that this may improve someone else’s financial condition, and not yours.
If you had such an experience, please share it with me.
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Comments 2
Hi Uli, I have an IRA annuity. I went to work for a small city in 2001 and the “financial advisor” put me in Putman funds and a Security Benefit annuity.
When I left in 2004, I was not able to roll over the annunity without paying a 8% fee. So I have left it and fortunately it has done ok, even after the 5% ongoing fee that they continue to charge me.
Did I know it was an annuity when he suggested it? No, because I was not educated enough and he did not disclose it. He also put me in Putman during the time they were being investigated by the SEC. When I asked to switch to another less volatile fund company, he told me I couldn’t.
Was he an ethical advisor? Since he has done this to other fellow employees, I say no. What do you think? Thanks for all your great advise and time helping us.
Hi Raledo,
Unfortunately, your story is very similar to many others I have heard over the years.
It supports my long held argument that many commission based advisors (I said many not all) have a direct conflict of interest and can’t give you an unbiased opinion.
Why? Because they are locked into only being able to sell the products of the company they’re working for.
I believe that it is in an investor’s best interest to deal with a fee-only advisor because that is as close as possible as you can get to advice that is best suited to your needs. Look at this way, what is the motivation for a salesman to continue working with a client if he gets all of his commission up front?
I can’t say whether your advisor is ethical or not. He’s doing what he is told to do by his employer and that is to “sell product.” That includes at times, as the now famous commercial said, “putting some lipstick on that pig.”
By being aware of how these annuities are sold, you might be better equipped next time you face a similar situation.
Ulli…