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A lot of investors want to know if they should have an annuity inside an IRA. In almost all cases, putting a tax deferred investment, like an annuity, into an IRA is a dumb idea. Tom and Brendan explain more about why you shouldn’t put an annuity inside an IRA in this week’s podcast.
Tom met with a new client recently who has an annuity inside an IRA. She wanted to surrender the annuity, but figured it would end up costing her additional money. Most investors know that surrendering an annuity before its specified date incurs charges. However, if the annuity is inside an IRA and you are over 59.5 the surrender charge will be waived in most cases. This is because it is considered an IRA distribution. You’ll have 60 days to deposit the funds from your annuity into a different IRA, where you will have unlimited investment options and you won’t be paying a trailing commission to the broker who sold you the annuity. It’s a way to escape an annuity where you are simply not making the money that you expected to or were promised.
An IRA is a tax deferred account, and there are no benefits in putting a tax deferred investment like an annuity inside of one. When you buy an annuity, you’re given a list of funds that you can invest in. By putting an annuity inside an IRA, you’re limiting what you can invest in because an IRA typically offers unlimited investing options. If you really wanted to you could invest in all of the same mutual funds the annuity offers, minus the additional fees they charge you, by just having a traditional IRA account. By having an annuity inside your IRA you are generating more expenses for yourself, while reaping no benefits. There is very little, if any, upside at all in doing something like this.
Make sure to listen to this week’s Mullooly Asset Management podcast to hear more about annuities and why they don’t mix with IRA’s.