IRA or Annuity - What's Right for You?

» Barbara Nicholson Bell - Can you advise?

Many years ago I started a Flexible Premium Annuity with my employer, an insurance company. The premiums came out of my paycheck automatically. When I left that job I stopped contributing to the annuity. It had pitiful earnings for most of the time since, and now just totals a little over $1000. I'd like to have that money now, it won't add anything to my retirement income, and the monthly statements say the cash surrender value equals that total.

Will I lose 30% or more if I cash it in now? I'm ten years from retirement. Is it worth keeping, or should I cash it in?

-- posted by Barbara Nicholson Bell

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» annneedle - Your annuity -- Cash and carry?

Hi Barbara:

Yes, you could get the annuity now and sidestep losing the 30% -- if you make the right moves. And, you could still end up losing something, it won't be as drastic as that 30%. (For those who don't know, that's 20% withheld by the IRS until next tax time, plus a 10% early withdrawal penalty, which isn't refundable).

What you can do is roll this over into a traditional IRA, then make the withdrawal from there. Doing this means you avoid the 20% withholding mess, though you still get hit with the 10% penalty IF you haven't reached age 59-1/2. Of course, you'll also owe income taxes on the withdrawal. While this is time-consuming, this beats the 30% alternative.

Note that I didn't mention rolling this into either a Roth IRA or a "qualified" employer-sponsored plan, such as a 401(k). With the Roth IRA, the IRS is still remarkably cagey about whether or not you can roll a tax-sheltered annuity into this investment and enjoy the same rollover deal as with the traditional IRA. Really, I'm serious -- not a word either way anywhere in the latest IRS publications, and I combed them previously when someone else wrote me on a similar issue. Before I do my IRA article I'm dropping the IRS a line in an attempt to get an answer.

As for a 401(k) or other qualified plan, this rollover could be done, but you'd be hit with the same 20% withholding + 10% penalty deal as with a direct annuity withdrawal if the withdrawal is early (pre-59-1/2).

Your other alternative is to do the traditional IRA rollover and invest this money into something with growth potential, then wait until you can take a penalty-free withdrawal. Granted, it sounds as if you need the money, but it's also apparent that you're disappointed in performance, so maybe you could reinvest it and make up for some lost time.

Hope this helps -- look for my IRA articles in the next several weeks for more insight on whether a Roth IRA would be a viable rollover. Good luck!

Ann

-- posted by annneedle

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