4

Right out of college I started a Roth IRA through a financial advisor that I knew in school. I had it for a few years, then in 2004 he called me up and wanted to switch it to a "Flexible Premium Deferred Variable Annuity" because he thought it would serve me better. I naively trusted him and switched it.

Now that I'm re-evaluating my retirement, I don't really know what the heck this thing is. It's a variable annuity, but on my statements it says my tax treatment is "Roth IRA". I can only contribute $5000 a year, the same as a Roth. And of course, the fees are much higher than they should be. I would like to switch this over to a true Roth IRA with Vanguard. I have no penalties for "Surrender Value" since I've had it long enough.

Can anyone explain what exactly this is? Is this annuity tax-deferred and not tax-free like a Roth (after 59 and half)? Are there any gotchas to switching it over to a true Roth IRA with Vanguard?

Improve this question
6
  • 2
    This is borderline criminal in my opinion. You likely bought that broker a trip to Hawaii on the huge commission. Good luck getting out of that investment, they usually have massive surrender charges.
    – JohnFx ♦
    Commented Apr 17, 2012 at 2:22
  • 1
    Correction. The fact that he had you double tax protect it in an IRA makes puts it over the borderline into fraud territory IMHO. Unfortunately, the law doesn't see it that way.
    – JohnFx ♦
    Commented Apr 17, 2012 at 2:24
  • 1
    The surrender charges were 7% decreasing by 1% every year. I'm in year 8, so I hope I'm OK. I really screwed up on it, but I was just a naive kid out of college. Thought this guy I knew had my best interest at heart, but didn't do my due diligence. I won't be making the same mistake again. I may pay for financial guidance, but the person I pay won't have a vested interest in what I invest in.
    – codeConcussion
    Commented Apr 17, 2012 at 2:26
  • 1
    I don't blame you one bit. I've heard the sales pitches and they are extremely enticing even for someone who knows better. It makes me furious knowing someone scammed you like that.
    – JohnFx ♦
    Commented Apr 17, 2012 at 2:27
  • 3
    I'd echo what John Fx said. There's a level of suitability that's the responsibility of the salesman to prove. I have very little respect for the mixing of life insurance product with investments in general, but this crosses the line. Even amateurs know to never put tax favored products in tax sheltered accounts. There are cartoons that illustrate the special place in hell for salesmen that do so.
    – JTP - Apologise to Monica ♦
    Commented Apr 17, 2012 at 16:52

2 Answers 2

Reset to default
7

This answer is provided mostly to answer your question "what is it?"

A variable annuity is a contract between you and an insurance company. The insurance company takes a bunch of money up front as a lump sum, and will pay you some money yearly - like earning interest. (In this case, they will probably be paying you the money into the account itself).

How much they return is, as the name suggests, variable. It can be anything, depending on what the contract says. Mostly, there will be some formula based on the stock market - frequently, the performance of the Standard & Poors 500 Index. There will typically be some minimum returns and maximum returns - if the stock market tanks, your annuity will not lose a ton of value, but if the stock market goes up a lot in one year (as it frequently does), you will not gain a lot of value either.

If you are going to be in the market for a long amount of time (decades, e.g. "a few years out of college" and then a little), it makes a lot more sense to invest in the stock market directly. This is essentially what the insurance company is going to do, except you can cut out the middleman. You can get a lot more money that way. You are essentially paying the insurance company to take on some stock market risk for you - you are buying some safety. Buying safety like this is expensive.

Variable annuities are the right investment for a few people in a few circumstances - mostly, if you're near retirement, it's one way to have an option for a "safe" investment, for a portion (but not all) of your portfolio. Maybe. Depending on the specifics, a lot. If you are under, like, 50 or so? Almost certainly a terrible investment which will gradually waste your money (by not growing it as fast as it deserves to be grown).

Since you want to transfer it to Vanguard, you can probably call Vanguard, ask to open a Roth IRA, and request assistance rolling it over from the place it is held now. There should be no legal restrictions or tax consequences from transferring the money from one Roth IRA account to another.

Improve this answer
1
  • 2
    +1 for suggesting a call to Vanguard. When transfering to another broker always initiate the process with the new broker. Its in their best interest to make sure the transaction goes smoothly. They will usually go the extra mile to make sure it does. I've seen brokers do some underhanded things to squeeze a few extra dollars out of a customer that was leaving them by splitting transfers up into chunks and charging transaction fees for each chunk.
    – Kenneth Cochran
    Commented Apr 19, 2012 at 15:38
4

Your financial advisor got a pretty good commission for selling you the annuity is what happened. As for transferring it over to Vanguard (or any other company) and investing it in something else, go to Vanguard's site, tell them that you want to open a new Roth IRA account by doing a trustee-to-trustee transfer from your other Roth IRA account, and tell them to go get the funds for you from your current Roth IRA trustee. You will need to sign some papers authorizing Vanguard to go fetch, make sure all the account numbers and the name of the current trustee (usually a company with a name that includes Trust or Fiduciary as shown on your latest statement) are correct, and sit back and wait while your life improves.

Improve this answer
2
  • 1
    One thing to be careful of is the surrender fee. They are usually pretty high to protect the giant profit margins on these investment products after they pay out insane commissions to the brokers.
    – JohnFx ♦
    Commented Apr 17, 2012 at 2:23
  • @JohnFx Yes, but the OP did say there were no surrender charges, and so my answer was based on that assumption. I do agree with you about the nature of the advice the OP got.
    – Dilip Sarwate
    Commented Apr 17, 2012 at 8:52

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .