Sunday Morning Quick Hits # 7: Variable Annuity In Your IRA? That's Brutal!
Let’s be totally honest. If a financial advisor, broker or other so-called investment professional advises you to purchase a variable annuity in your IRA, you should in nearly every case fire that advisor or walk out of the room.
Why? You don’t wear a belt AND suspenders, do you? Of course not. Which is why you don’t need to buy a tax-deferred status investment (the variable annuity) in a tax-deferred account (the IRA). You are duplicating needlessly the ability to save money, to allow the money to grow tax-free, to control when you withdraw the money, and to pay taxes at a certain age with a lower tax bracket.
Most reasonable people think that the greatest benefit to a variable annuity, which is tax-deferred status, is just foolishly duplicated with a much higher cost when that variable annuity is in an IRA account.
You also dramatically increase your fees with a variable annuity in an IRA (which your financial advisor probably loves), but is just terrible for you. What kind of fee increase? Let’s start with a mortality and expense charge. We just saw this fee for a client set at 1.7%. Ouch.
What other fees also get tacked on to the poor owner of a variable annuity in an IRA? Sub-account investments have a separate expense ratio like a mutual fund. There are administrative fees most likely that apply to your variable annuity in an IRA, and maybe you are even charged commissions ongoing or an investment management fee by your financial advisor as well. Understand the concept of investment death by fees? We hope so. That may be you if you allow this to happen.
Let’s just keep going on what’s not so great about variable annuities in IRAs.
You have limited investment options. Rather than an IRA usually having the entire globe of thousands of investment options, you may be limited to a 100 investments or less and they are generally high-expense mutual fund options.
Withdrawal options also are generally terrible with a variable annuity in an IRA. Variable annuities have withdrawal penalties of 5 – 10% for a period of years. So if you wanted to take money out of your IRA for a qualified expense like higher education or medical costs, you may get zinged for an early withdrawal by the variable annuity. So you really can’t take the money out of your IRA as intended then.
If that’s not enough reason to avoid a variable annuity in your IRA like the plague, you may have to pay transfer fees to move your money around between sub-accounts. You could pay transaction fees in an IRA, but typically we’ve seen variable annuity costs far exceed those fees in IRAs. We just don’t see the case made by many insurance companies and advisors for this practice, that the lifetime death benefit and income guarantees that you get (and pay handsomely for) in a variable annuity justify all the other negatives for buying in your IRA.
So we say in summary: Unless there is some really unheard of reason to do it ... just say no to a Variable Annuity in an IRA!