Time to surrender qualified annuity?

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Time to surrender qualified annuity?

Postby daz770 » Sun Mar 24, 2013 7:35 pm

Fellow BogleHeads, I am a long-time reader of this fabulous forum. I'd like to take this opportunity to thank the moderators and contributors who make this such a unique online community.

I am 55 years old. My wife is 52. After decades of index investing, saving a large chunk of our salaries, and generous bequests from our parents, we have assets of $5M (including primary residence). Liabilities consist only of the monthly credit card statement which is paid in full. We own no other homes. Our last child is finishing college at an in-state public institution. Our two other children are gainfully employed. We will (hopefully!) have a wedding in the future for our daughter, and we anticipate contributing to our two sons' weddings one day.

When my wife left a previous employer in 2009, we fell for an annuity contract. We rolled over her $50K 401(k) plan into a fixed indexed deferred annuity. After 10 years (in 2019), my wife will have the choice to (1) take an income stream based on 7.2% compounded interest or (2) take a lump-sum of the accumulated account balance on the anniversary date (no guaranteed value). No additional appreciation will occur after the tenth anniversary.

If my wife takes the income stream, she will receive 7%/year of the accumulated (7.2% annually compounded over 10 years) account value until the balance runs out. This translates to a dismal sub-3% return on her money over the life of the contract. 7.2% guaranteed growth sounds great -- but it is only for the "growth period" as an ANYA (annuity not yet annuitized). Growth completely ceases during the "pay-out period" with no adjustment even for inflation -- that is 0.0% growth. [Actually, it is negative growth due to inflation...]

We just received the latest anniversary contract statement. After four (4) years, the contract value using "investment strategies" in which premiums are deducted is now $61K. The 7.2% annual compounded value is now $68.5K. (But this value can only be "realized" if held for 10 years and then annuitized into an income stream.)

The cash surrender value is currently $51K -- just $1K more than the principal when she left her employer in 2009.

We are entertaining the idea of surrendering the contract and rolling the $51K into a Traditional IRA. When we retire in a few years, our tax bracket will fall and we plan to slowly convert the tIRA to a Roth prior to the start of the RMD when she turns 70.5 in 2032.

With a balanced asset allocation of low-cost index funds, we feel confident that we can "beat" the sub-3%/year return of the annuity (again, that is the average return of 7.2% for 10 years and 0.0% for approximately a 14 year pay-out period). We are not concerned about outliving our money. Our dividends in taxable brokerage accounts currently yield more than our salaries -- and I plan to continue working for a few more years. In all likelihood, should we succeed in rolling over this asset to a Roth during retirement years (prior to taking SS), we will never touch this money and it will eventually be left to our children.

Given our situation, I am hopeful that the community here can pose additional considerations that we may have overlooked and should well discuss prior to surrendering an annuity contract.
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Re: Time to surrender qualified annuity?

Postby bsteiner » Sun Mar 24, 2013 9:58 pm

The ability to convert to a Roth in a low tax bracket can add substantial value.
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Re: Time to surrender qualified annuity?

Postby Mel Lindauer » Sun Mar 24, 2013 10:37 pm

daz770 wrote:Fellow BogleHeads, I am a long-time reader of this fabulous forum. I'd like to take this opportunity to thank the moderators and contributors who make this such a unique online community.

I am 55 years old. My wife is 52. After decades of index investing, saving a large chunk of our salaries, and generous bequests from our parents, we have assets of $5M (including primary residence). Liabilities consist only of the monthly credit card statement which is paid in full. We own no other homes. Our last child is finishing college at an in-state public institution. Our two other children are gainfully employed. We will (hopefully!) have a wedding in the future for our daughter, and we anticipate contributing to our two sons' weddings one day.

When my wife left a previous employer in 2009, we fell for an annuity contract. We rolled over her $50K 401(k) plan into a fixed indexed deferred annuity. After 10 years (in 2019), my wife will have the choice to (1) take an income stream based on 7.2% compounded interest or (2) take a lump-sum of the accumulated account balance on the anniversary date (no guaranteed value). No additional appreciation will occur after the tenth anniversary.

If my wife takes the income stream, she will receive 7%/year of the accumulated (7.2% annually compounded over 10 years) account value until the balance runs out. This translates to a dismal sub-3% return on her money over the life of the contract. 7.2% guaranteed growth sounds great -- but it is only for the "growth period" as an ANYA (annuity not yet annuitized). Growth completely ceases during the "pay-out period" with no adjustment even for inflation -- that is 0.0% growth. [Actually, it is negative growth due to inflation...]

We just received the latest anniversary contract statement. After four (4) years, the contract value using "investment strategies" in which premiums are deducted is now $61K. The 7.2% annual compounded value is now $68.5K. (But this value can only be "realized" if held for 10 years and then annuitized into an income stream.)

The cash surrender value is currently $51K -- just $1K more than the principal when she left her employer in 2009.

We are entertaining the idea of surrendering the contract and rolling the $51K into a Traditional IRA. When we retire in a few years, our tax bracket will fall and we plan to slowly convert the tIRA to a Roth prior to the start of the RMD when she turns 70.5 in 2032.

With a balanced asset allocation of low-cost index funds, we feel confident that we can "beat" the sub-3%/year return of the annuity (again, that is the average return of 7.2% for 10 years and 0.0% for approximately a 14 year pay-out period). We are not concerned about outliving our money. Our dividends in taxable brokerage accounts currently yield more than our salaries -- and I plan to continue working for a few more years. In all likelihood, should we succeed in rolling over this asset to a Roth during retirement years (prior to taking SS), we will never touch this money and it will eventually be left to our children.

Given our situation, I am hopeful that the community here can pose additional considerations that we may have overlooked and should well discuss prior to surrendering an annuity contract.


Is the reason the surrender value is so low because there's a surrender fee? Since surrender fees often run for seven or more years, if she got stuck with it in 2009, she may still be in the surrender period. You'll want to find out about that, since it could factor into your final decision. Also find out how much the surrender fee drops on the next anniversary period, since you may want to wait to move it if the next anniversary date is approaching.
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Re: Time to surrender qualified annuity?

Postby dickenjb » Mon Mar 25, 2013 7:50 am

+1 on Mel's advice to look at surrender fee decay schedule. These vary widely among products but 7% initially going to 0% after 7 years is common.

Also you talk about rolling it into a traditional IRA - I believe you will find the annuity is already in a TIRA - I guess you mean rolling it from one TIRA to another...
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Re: Time to surrender qualified annuity?

Postby Calm Man » Mon Mar 25, 2013 9:53 am

You have 5 mjllion dollars. This whole 50K or 100K is 1% of your assets. I would get it the bland out of there asap or it will bug you until you take a lump sum in 2019. I have done this with a whole bunch of things in the last several years and I love it when each nuisance account goes away forever.
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Re: Time to surrender qualified annuity?

Postby deanbrew » Tue Mar 26, 2013 7:15 am

Why not let it in there for the ten years and then decide? As other said, I imagine you are in an initial period where surrender fees will eat up most of the gains. I would let it go until the ten years are up and then look at the numbers.

I'm not that familiar with annuities, but is this one where your wife won't get a payout for the rest of her life, but rather for a shorter period? I thought insurance annuities usually ran until death.
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Re: Time to surrender qualified annuity?

Postby daz770 » Mon Jun 10, 2013 11:53 pm

dickenjb wrote:+1 on Mel's advice to look at surrender fee decay schedule. These vary widely among products but 7% initially going to 0% after 7 years is common.

Also you talk about rolling it into a traditional IRA - I believe you will find the annuity is already in a TIRA - I guess you mean rolling it from one TIRA to another...


You are absolutely correct. "Rollover" is not the correct term here, as the annuity is already in a tIRA. I am simply discussing a transfer from tIRA to tIRA.

After much research, I have a tax question. I will seek out the input of a CPA before taking any action.

The annuity company permits a 10% "free surrender value" of the current contract value. The surrender fee remains on the remaining balance of the contract. Should we elect to take a 10% "free surrender," the company will send a check. So long as we deposit the funds in my wife's tIRA at Vanguard within 60 days, do we trigger a tax implication? In other words, we are moving 10% of the annuity from a tIRA with the insurance company to a tIRA with a brokerage. My wife is under 59.5 and does not wish to take the funds now by realizing the ordinary income or paying an IRS penalty. I expect that the insurance company will send a 1099-R documenting 10% of the contract value dispersed. We would then show that the funds were deposited into another tIRA. Vanguard will send the Form 5498 showing receipt of the funds...

Does this sound correct? Thanks for the thoughts.
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Re: Time to surrender qualified annuity?

Postby Mazz » Tue Jun 11, 2013 12:14 am

I do not know of ANY case where it is better to stay in an annuity because it has a surrender fee.
I can not make this point any clearer.

The higher fees on annuity contracts are so extremely high that it negates any reason to stay in because of the penalty.
Also, these Index linked products are misleading. They NEVER deliver 100% of the return of the market index. NEVER.

I recently helped an employee of mine who was sold a Variable Annuity for her IRA. There was a 5% penalty to get out. The total annual fees (including all of the the hidden fees) were between 2.0 and 3.0% higher than if she had it in an IRA. It didn't make since to stay in this vehicles for the 5 years remaining.

Pull it out and move on.
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