Should I pay Surrender Fee to close Varariable Annuity?

There is a variable annuity in a Traditional IRA with a current account value of $89,000.

It is 5 years old now so the surrender fee is now at 5%. The surrender fee will go down by 1% each year.

Is it wise to pay the $4,450. surrender fee to dump the annuity and then take the balance and invest in some Vanguard Funds?

The stupid annuity has over 2.00% in annual fees and the investment fund that it is in has 1.03% expense ratio while the Vanguard 500 Index Fund has an expense ratio of 0.15% and currently has a 5 year return of 11.18%.

What do you guys think?

there is no way to tell you the answer to this question. in fact, you give us such limited information in every regard, it would be malfeasance to tell you anything. it appears that all you are interested in is costs. factually speaking, the vanguard index will clearly be lower cost. of course, making the move could be totally inappropriate for you. we just cant tell.

go hire a financial advisor and pay them for an hour of work to review it for you.

It was a financial advisor that put me into a variable annuity in my Traditional IRA and also put me in a variable annuity in my Roth IRA.

This was 5 years ago before I started learning anything about personal finance and investing.

Why would an advisor put your in a varaible annuity inside your IRA when your IRA is already a tax shelter. He did it for the commission.

This same advisor told me to open a UTMA instead of a 529 plan for my son's college savings account.

I think I will keep reading and learning myself and not go sit down and pay an advisor for an hour.

the problem 10can, is that each of the recommendations made (the VA and the UTMA) in lieu of other choices may have been appropriate for you. my point is that we cannot form an opinion on the matter because you are all over the place on your comments. further, you comments are certainly not comprehensive on what you do share with us.

if all you want is low costs and do not care about performance, risk, and a whole myriad of other matters then we can tell that the VA was likely not a good choice ... because it has costs. with all due respect to you sir, it sounds like you still have a lot of holes in your learning about personal finance. to that end, i would agree that your advisor should have done better ... because he should be teaching you the pros and cons of your choices.

for a quick example, a UTMA is perfectly appropriate instead of a 529. further, the advisor likely made the same commish on either one. yet you imply he only did it for the commish and or you imply it was a bad recommendation. again, it might have been a bad recommendation, but you just dont tell us enough to know enough to be helpful.

that is why i recommend an hour with an advisor. he or she can review it and give you the education you need (or point you in the right direction for you to educate yourself).

not understanding the why's of what you are doing and the different methodologies you can employ can CERTAINLY cost you more in the end than a few hundred dollars paid now.

that said, it is your money and your life. good luck in your decisionmaking.

There is no doubt I still have much to learn and I really have more to learn about Variable Annuities; they are very complicated in my opinion.

I clearly told him I wanted a college savings plan for my son which in that case a 529 plan is better than a UTMA but that investment is not my main concern.

Since I started doing my own research and learning about how these investments work every article I have read or podcast I have listened to the advisors are saying how very few people should be in variable annuities and you definitely should not have one in your retirement account.

I am not sure what to expect for future fund performance but it shows that the annuity was purchased in December of 2003 for $68,000 and it is now valued at $89,000.

Would the 5% surrender charge be based on the $68,000. or the $89,000.

Thanks

You most likely have a 10% "surrender free" window, so subtract 10% of your current ($89k) balance and apply the 5% surrender to the rest.

The net surrender charge will be 4.5% of the entire balance, so if your next investment (disregarding performance) is 1% cheaper annually, your breakpoint on the surrender will be 4.5 years with your next choice to fully recover your loss.

As an aside, an UTMA for a younger child is usually a much better choice than a 529, so your premise of inpropriety is mistaken or misunderstood. An UTMA can be moved to a 529 the year prior to applying to financial aid anyway, so why pigeonhole it for education that may or may not happen 18 years down the road?

The taxation of an UTMA can be even more favorable than 529 as well. The UTMA funds are taxed each year at the childs rate...usually ZERO. The cost basis continues to grow! In a 529 the taxation is simply deferred and the cost basis never goes up and if you don't use it for qualified education expenses, then you are also assessed a penalty.

Thank you very much pricespector, this is exactly the kind of information I was looking for.

I see now what you are saying about the UTMA vs the 529 plan. The 529 is better when the child is near High School graduation because it will not hurt potential financial aid plus the child must use the money for college and not to buy his girlfriend a diamond ring but the UTMA is better when he is young because of what you stated plus you could always use the money for other things if needed like braces, car insurance, etc...

Thanks

You most likely have a 10% "surrender free" window, so subtract 10% of your current ($89k) balance and apply the 5% surrender to the rest.

Can you take out 10% each year "surrender free" and move that money to an IRA with Vanguard keeping it tax sheltered or would you have to claim that money as income???

I guess you could take out 10% and pay the income tax then put that money in your Roth account.

Thanks

A couple of downsides to the UTMA:

- this money belongs to the child at age 18 or 21 (age of majority in the state of residence), and as such can not (without an argument) be transferred to a younger sibling in the case of its not being used for education.

- if the funds are not used for education, the parent can not retrieve the funds for their own use

- if significant funds are being set aside (and college funds are significant!) then there could be taxation of amounts earned above the child's exemption ($1800 in 2008). It's not hard to imagine a fund of $30,000+ being set aside for college, that earns 6% or more a year.

- if you don't get the UTMA moved into a 529 before the end of the year prior to the first FAFSA filing, the UTMA is counted as a student asset, 100% applicable to the EFC for financial aid calculations.

Just balancing out the recommendations. There are upsides to either plan, and downsides, so determine which factors mean the most to you in order to make your decisions about what is best for you.

- this money belongs to the child at age 18 or 21 (age of majority in the state of residence), and as such can not (without an argument) be transferred to a younger sibling in the case of its not being used for education.

I should clarify the above: In order to transfer that money to a sibling (or anyone else) the owner (the child) of the UTMA must make a "gift" to the other person, subject to gift tax exemptions and limits. And this is if you can talk the child into making the gift - remember, this is a college-age child who has legal ownership of these funds. The child may decide he needs a Hummer instead of a college education, and there's little you can do about it beyond exerting parental influence (good luck!).

if significant funds are being set aside (and college funds are significant!) then there could be taxation of amounts earned above the child's exemption ($1800 in 2008). It's not hard to imagine a fund of $30,000+ being set aside for college, that earns 6% or more a year.
This is is true, but the 6% would have to be interest and dividends alone ($30000 in a CD/bond earning 6%). If the fund is growth oriented, this lump sum could much, much larger without triggering any annual taxes due because capital gains will remain deferred. For example, $100,000 of a stock or a growth funds that pay no interest/dividends could easily come in under the child's exclusion. The gains would not be reported on the annual 1099.

And yes, if you are caught with an UTMA the year prior to applying for financial aid it could hurt. Although 100% of the UTMA asset would count on the FAFSA, the penalty is only 20% against EFC. But once it's transferred to a 529, it is considered a parental asset for FAFSA.

Can you take out 10% each year "surrender free" and move that money to an IRA with Vanguard keeping it tax sheltered or would you have to claim that money as income???
First, you have to read the contract to see what surrender free window you have. Then...

Yes, you can do partial rollovers of the 10% window over a series of years until you reach your zero surrender period.

I guess you could take out 10% and pay the income tax then put that money in your Roth account.
This would have to be done as a direct conversion. Don't just take it out and plunk it into your Roth. You'll likely get hit a 10% early withdrawal penalty if this is done improperly. Use an institution-to-institution transfer for this.

10can, there are so many reasons why you shouldn't be trying to figure this out on your own. I understand feeling like you were taken for a ride by this advisor, no one wants to think they were ripped off. However, the source of your worry is actually what worries me.

You got advice from a professional who, at the very least, knew the basics to your financial situation (how much you had, your goals, and your age). You then read advice from someone (or a number of people) that never met you, and assumed they were correct.

Maybe your advisor was wrong, maybe not. Clearly, you don't trust that person enough, so go to someone else. But 1Mo was absolutely right in telling you to sit down for an hour with somebody who can educate you properly. Someone who knows your entire situation.

I see your responses to these posts that are trying to help you and, to be honest with you, I cringe. When you take a phrase that someone makes and turn it into a general blanket statement, you become what caused your problem in the first place. Those people writing statements like "Annuities are already tax deferred, so they shouldn't be in IRAs" are doing a disservice to you, and to all of those people for whom tax deferral isn't the issue. People who might need a guarantee to feel safe about their money, and they are willing to pay for it will be turned off of annuities because of a statement like that which they read in a financial forum like this, and they will end up rolling cds for 15 years and costing themselves thousands upon thousands of dollars. All because someone who didn't know them, didn't like annuities, either because they got burned once, or they found out that they pay commissions, or maybe just because they heard it from someone else and decided to post the same misguided information themselves.

So go get professional help. Please don't do this alone.