Variable annuity 100k in fees help (UPDATE)

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Trevor
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Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Tue Sep 02, 2014 1:31 pm

Hello Bogleheads. Sorry for the inconsistencies in my last thread, I have the facts now.



Emergency funds: Yes
Debt: No
Tax Filing Status: single
Tax Rate: 15% Federal, 6% State
State of Residence: WI
Age: 20
Desired Asset allocation: 95% stocks / 5% bonds
Desired International allocation: 40% of stocks



I want to withdraw everything from my variable annuity and pay an extra 10% in early withdrawal fees, plus income tax on 230k of earnings.


Annuity: https://www.jackson.com/annuities/varia ... dc007d006f
Flat expense fee: 1%
Underlying fund expense: over 1%
Variable annuity type: non qualified (cannot be rolled over to anything besides another annuity)
Cost basis: 250k
Current value: 480k
Surrender fees? Yes, for the next 4 years and 3 months
Surrender free withdrawals: 45k every contract year, meaning the number will reset in 3 months from now.



I want to avoid additional surrender charges. This means that I would be withdrawing the money over 4 tax periods. Earnings are withdrawn first, so I would be splitting up the income tax liability over a few years. I owe income taxes on 230k and plus an additional 10% early withdrawal. I estimate those fees to be around 100k when all is said and done.


Here is my reasoning: If I leave my money in a variable annuity for 40+ years, even if it's a very low-cost annuity (my current annuity is far from it) I will have to pay full income tax on millions of earnings. My plan is to take the tax hit now (my income bracket is also pretty low right now) instead of later and invest everything into VTSAX and VTIAX in taxable accounts. I will max out retirement accounts when available. Then I will basically hold these investments for the rest of my life using the Boglehead philosophy. I will also hold a very small amount of bonds.


As a side note, I already have a sizable amount in taxable assets, so if I paid a 100k fee now it would not be TOO big of a setback to my overall portfolio. Certainly much less than paying full income taxes on millions of earnings.


My financial advisor also mentioned that long-term capital gains may disappear in the next few years and that could throw a wrench in my plan. What do you Bogleheads think?


Also, here's some quotes that you guys might enjoy:
"I have never seen a Vanguard equity index fund in the top 15 earning funds" :oops:


"It's not as simple as just investing into index funds, if it was I wouldn't have a job" :moneybag :moneybag :moneybag


"Index funds are good but they will never give you 20% returns over the market that some active management can"
WWJD - What Would Jack Do?

bberris
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Re: Variable annuity 100k in fees help (UPDATE)

Post by bberris » Tue Sep 02, 2014 3:16 pm

Please don't leave this guy. We need the laughs. Got any more good ones?

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HomerJ
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Re: Variable annuity 100k in fees help (UPDATE)

Post by HomerJ » Tue Sep 02, 2014 3:30 pm

Trevor wrote:"Index funds are good but they will never give you 20% returns over the market that some active management can"
They'll also never give you returns under the market like MOST active management can.

Jack FFR1846
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Re: Variable annuity 100k in fees help (UPDATE)

Post by Jack FFR1846 » Tue Sep 02, 2014 3:33 pm

20% over market! Cool,,, sign me up. I'll take a lein on the advisor's house against every penny it doesnt beat the market by.
Bogle: Smart Beta is stupid

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BL
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Re: Variable annuity 100k in fees help (UPDATE)

Post by BL » Tue Sep 02, 2014 3:33 pm

Please get some facts from a Vanguard annuity guy and see if doing a 1035 into their low-cost annuity would make sense (I am not saying that it would, but the cost of cashing it in is pretty huge already.).
Maybe someone here will help on figuring out the costs.

Sounds like you really need to get away from "your" guy.

Low cost funds are the way to go!

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Re: Variable annuity 100k in fees help (UPDATE)

Post by miantosca » Tue Sep 02, 2014 3:39 pm

Just take the 10% withdrawals each year until it is out of surrender, that will help you avoid the additional charges and keep you in a lower tax bracket. Remember if you took out $235,000 in income you would pay substantially more in taxes than spreading it out over a few years (especially if your personal earnings are going to stay low like they are now). Also, if you are managing your total assets (this annuity plus your taxable account) as if its one big pool of money, put any bonds inside the variable annuity to defer the income taxes and focus the more tax-efficient investments in the taxable accounts.

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Trevor
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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Tue Sep 02, 2014 4:06 pm

These are the total fees for Vanguard's annuity funds


Image
Image
WWJD - What Would Jack Do?

LongerPrimer
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Re: Variable annuity 100k in fees help (UPDATE)

Post by LongerPrimer » Tue Sep 02, 2014 5:53 pm

Again I would question the trust administrator who may be the real culprit in your short financial life. :oops: :dollar :confused :idea:

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Re: Variable annuity 100k in fees help (UPDATE)

Post by pkcrafter » Tue Sep 02, 2014 7:47 pm

Trevor, I think it might be a better idea to hold the annuity until the surrender charges no longer apply. If you can do a 1035 exchange to Vanguard without cost/taxes, then that's the clear choice. I'm not familiar enough with annuities to know it the exchange can be done, but I think someone will know--or you can contact Vanguard.

Here's a quote from Vanguard's annuity page:
Source: Morningstar, Inc., as of December 2013. The Vanguard Variable Annuity has an average expense ratio of 0.57%, versus the annuity industry average of 2.27%; excludes fees for optional riders. Actual expense ratios for the Vanguard Variable Annuity range from 0.46% to 0.77%, depending on the investment allocation. The expense ratio includes an administrative fee of 0.10% and a mortality and expense risk fee of 0.195%. The expense ratio excludes additional fees that would apply if the Return of Premium Death Benefit rider or Guaranteed Lifetime Withdrawal Benefit rider is elected. In addition, contracts with balances under $25,000 are subject to a $25 annual maintenance fee.

Paul

The expense ratios you show above are not cumulative.

https://investor.vanguard.com/annuity/variable

You can also compare the Jackson annuity cost to Vanguard's here:

https://personal.vanguard.com/us/whatwe ... calculator

You can try it, but I suspect the charges for Jackson are ~2.4%
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Trevor
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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Tue Sep 02, 2014 8:18 pm

Once the surrender charges are off, I should be able to 1035 exchange the entire amount to Vanguard without paying any fees. Maybe that's the logical thing to do. Interested in hearing more opinions :D


bberris wrote:Please don't leave this guy. We need the laughs. Got any more good ones?

Here's another gem...something along the lines of "fees are important, but they are only half of the puzzle. The other half is the actual returns your investments are getting"


Then he used some example like an active fund that costed 1% more in fees but beat the index by 2%. Clearly, the active fund is the best choice. Can anyone point me out to this fund? Thanks :greedy
WWJD - What Would Jack Do?

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grabiner
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Re: Variable annuity 100k in fees help (UPDATE)

Post by grabiner » Tue Sep 02, 2014 9:27 pm

Trevor wrote:My financial advisor also mentioned that long-term capital gains may disappear in the next few years and that could throw a wrench in my plan. What do you Bogleheads think?
It's unlikely that the tax on long-term capital gains will completely disappear, although rates might change up or down. If you have long-term capital gains in the 15% bracket, you currently pay no federal tax on the gains as long as you stay in that bracket.

The gains themselves could certainly disappear; that is the risk of the stock market. If your annuity is all in stock now, a crash like 2007-2009 will wipe out all the gains.
Wiki David Grabiner

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Re: Variable annuity 100k in fees help (UPDATE)

Post by bsteiner » Tue Sep 02, 2014 9:42 pm

grabiner wrote:
Trevor wrote:My financial advisor also mentioned that long-term capital gains may disappear in the next few years and that could throw a wrench in my plan. What do you Bogleheads think?
It's unlikely that the tax on long-term capital gains will completely disappear, although rates might change up or down. If you have long-term capital gains in the 15% bracket, you currently pay no federal tax on the gains as long as you stay in that bracket....
The tax treatment of long-term capital gains has been changed many times, and it may change again in the future. The tax rate on long-term capital gains could be increased to the same rate as on ordinary income, as was the case in the late 1980s. Or the tax on long-term capital gains could be eliminated. It's likely to change many times over the lifetime of a young person. When making your projections, you can use whatever assumption you want.

The annuity gives you deferral, at the cost of higher expenses, converting all of the income and gains to ordinary income, giving up the basis step-up at death, and reducing flexibility. You'll have to run the numbers, making whatever assumptions you want as to investment returns and income taxes, to see whether it appears preferable to keep the annuity (transferring it to a lower cost provider if desired), or to cash it in (either all at once or over a number of years).

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Re: Variable annuity 100k in fees help (UPDATE)

Post by Penguin » Tue Sep 02, 2014 10:08 pm

Once the surrender charges are off, I should be able to 1035 exchange the entire amount to Vanguard without paying any fees. Maybe that's the logical thing to do. Interested in hearing more opinions
This would not be my choice. In 4 years you can remove about $180,000 of the $235,000 taxable and pay tax at your low rate. Assuming the annuity has expense of 0.57% and you switch to Vanguard total stock market Admiral with expense 0.05% the difference is 0.52% per year. Over 40 years I think the difference is 1-0.9948^40= approximately 19%. In other words the annuity expense will cost you about 19% of your final assets. I would rather cash in the annuity in 4 years and pay the tax on the remaining earnings. Then transfer the proceeds to your desired Vanguard Index funds.
Jon

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Re: Variable annuity 100k in fees help (UPDATE)

Post by Dale_G » Tue Sep 02, 2014 10:54 pm

It is too late for me to post much tonight Trevor. In the meantime I suggest that you take a deep breath and relax. There is no need to do anything immediately. Measure twice and cut once as the old adage goes.

I will post later.

Dale
Volatility is my friend

dickenjb
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Re: Variable annuity 100k in fees help (UPDATE)

Post by dickenjb » Wed Sep 03, 2014 6:43 am

I am thinking 4 years of 10% withdrawals would take out most of the earnings and keep him mostly in the 10% and 15% bracket.

Trevor you keep using the word "fees" and you mean taxes and 10% penalty. Not fees at all. The fees are assessed inside the annuity.

protagonist
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Re: Variable annuity 100k in fees help (UPDATE)

Post by protagonist » Wed Sep 03, 2014 8:05 am

Hi, Trevor.

I am going to leave the financial advice to those here who know much more about this than I. If it is any consolation, however, IMHO it is a good thing that you took your financial reaming at age 20. You are thinking very clearly now, and your future is bound to be bright. I took mine in my late 30s when a financial advisor sold me shares in a "limited partnership". In retrospect it was probably the best thing that happened to me financially, because it made me realize I had to learn enough to take matters into my own hands.

I have no idea if you have any legal recourse to take against this guy for his unethical practices, but I would look into at least filing a formal complaint. Maybe speak with an attorney who deals with such matters- you may be able to get a free short initial consult. Others here would know more about what is possible.

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Trevor
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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Wed Sep 03, 2014 9:06 am

dickenjb wrote:I am thinking 4 years of 10% withdrawals would take out most of the earnings and keep him mostly in the 10% and 15% bracket.

Trevor you keep using the word "fees" and you mean taxes and 10% penalty. Not fees at all. The fees are assessed inside the annuity.

Point taken :D

Penguin wrote:
Once the surrender charges are off, I should be able to 1035 exchange the entire amount to Vanguard without paying any fees. Maybe that's the logical thing to do. Interested in hearing more opinions
This would not be my choice. In 4 years you can remove about $180,000 of the $235,000 taxable and pay tax at your low rate. Assuming the annuity has expense of 0.57% and you switch to Vanguard total stock market Admiral with expense 0.05% the difference is 0.52% per year. Over 40 years I think the difference is 1-0.9948^40= approximately 19%. In other words the annuity expense will cost you about 19% of your final assets. I would rather cash in the annuity in 4 years and pay the tax on the remaining earnings. Then transfer the proceeds to your desired Vanguard Index funds.

Well, there's also the opportunity cost of paying 100k in taxes now that would have been able to compound for 40 years, which would end up around 1m with conservative estimates.

Then again, if I keep my annuity at 480k it could end up around 5m in 40 years with a 6% returns estimate. If I left it for 50 years it could be around 9m. That's a lot of income tax I would eventually have to pay :confused :greedy


Also if I cashed out my annuity then I could focus more on the "good" retirement plans like maxing out a 401k and roth.
WWJD - What Would Jack Do?

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Re: Variable annuity 100k in fees help (UPDATE)

Post by CanyonCitySteve » Wed Sep 03, 2014 10:34 pm

Well, there's also the opportunity cost of paying 100k in taxes now that would have been able to compound for 40 years, which would end up around 1m with conservative estimates.
Then again, if I keep my annuity at 480k it could end up around 5m in 40 years with a 6% returns estimate. If I left it for 50 years it could be around 9m. That's a lot of income tax I would eventually have to pay
You're still going pay taxes on the gains when you withdraw, right? So, if I have this right, you have a few choices (I used 6% return):

1) Leave 480k in annuity (transferred to VG) to avoid withdrawal fees in taxes. In 40 years, you have 5.2M, 4.7M will be taxed as income as you withdraw.

2) Withdraw and pay 100k now. Invest 380k on same terms. Future value 4.1M; of which some is dividend income and some is LTCG.

Not sure you can take out any money before age 60 without penalty (I'm sure someone will correct me)

Anyway (Option 2) will have lower taxes, but you have an extra Million, as you said, in (Option 1) to pay them.

Hope I got this right.... Good luck!
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Trevor
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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Wed Sep 03, 2014 11:21 pm

CanyonCitySteve wrote:
Well, there's also the opportunity cost of paying 100k in taxes now that would have been able to compound for 40 years, which would end up around 1m with conservative estimates.
Then again, if I keep my annuity at 480k it could end up around 5m in 40 years with a 6% returns estimate. If I left it for 50 years it could be around 9m. That's a lot of income tax I would eventually have to pay
You're still going pay taxes on the gains when you withdraw, right? So, if I have this right, you have a few choices (I used 6% return):

1) Leave 480k in annuity (transferred to VG) to avoid withdrawal fees in taxes. In 40 years, you have 5.2M, 4.7M will be taxed as income as you withdraw.

2) Withdraw and pay 100k now. Invest 380k on same terms. Future value 4.1M; of which some is dividend income and some is LTCG.

Not sure you can take out any money before age 60 without penalty (I'm sure someone will correct me)

Anyway (Option 2) will have lower taxes, but you have an extra Million, as you said, in (Option 1) to pay them.

Hope I got this right.... Good luck!
I can't withdraw any of the earnings without an additional 10% early withdrawal tax. So the 100k figure includes both early withdrawal and income tax.

I did some quick calculations while including yearly expense fees. If the 380k is invested with .1% expense and the 480k is invested at .5% for 40 years, they would end up at 4m and 4.3m respectively. Much less of a difference.

Also something to consider is that the 380k would (ideally) not be invested in a taxable account for the entire 40 years.
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Re: Variable annuity 100k in fees help (UPDATE)

Post by grabiner » Wed Sep 03, 2014 11:27 pm

Trevor wrote:I did some quick calculations while including yearly expense fees. If the 380k is invested with .1% expense and the 480k is invested at .5% for 40 years, they would end up at 4m and 4.3m respectively. Much less of a difference.
However, the tax on withdrawal will be lower if you get out of the annuity. In the annuity, all gains over $200K will be taxed at your retirement tax rate, say 25%. In the taxable investment, capital gains over $380K plus any reinvested dividends will be taxed at 15%, and if you can make use of the taxable investment to max out your 401(k) and IRA every year, you gain even more from tax deferral. Thus, if you are planning to invest in stocks for the long run, getting out of the annuity is worthwhile. (If the annuity will be invested mostly in bonds, the value of the tax deferral on the bonds in the long run is likely to be enough to justify staying in a low-cost annuity.)
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Trevor
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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Wed Sep 03, 2014 11:33 pm

Thus, if you are planning to invest in stocks for the long run, getting out of the annuity is worthwhile.
Yes, my plan is to allocate 95% into very tax efficient total market funds. I will have 5% into bonds. I know it's sometimes said to not even bother with an allocation as low as 5%, but I feel like at my age 10% is unnecessary but 0% is too low.


Edit: How exactly are long term capital gains taxed? Are the total taxable income and short term gains added first to determine their tax bracket, then long term gains are added last and taxed in their corresponding long term tax rates?
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Re: Variable annuity 100k in fees help (UPDATE)

Post by LongerPrimer » Thu Sep 04, 2014 12:26 am

Again your problem may not be with the FA who was just following the directions of the Trust administrator.
I don't think you have explain how you got this annuity other than you had it as a minor (18 or younger) :?:

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BL
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Re: Variable annuity 100k in fees help (UPDATE)

Post by BL » Thu Sep 04, 2014 1:45 am

Edit: How exactly are long term capital gains taxed? Are the total taxable income and short term gains added first to determine their tax bracket, then long term gains are added last and taxed in their corresponding long term tax rates?
I suggest you get the paper forms on the IRS site along with instructions and do them to really understand how it works.
Both long and short term gains less losses are added to other taxable income to get the tax bracket. Then there is special calculations done on the gains to determine the tax.

There are no capital gains with annuities, only ordinary income.

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Re: Variable annuity 100k in fees help (UPDATE)

Post by dickenjb » Thu Sep 04, 2014 6:09 am

BL wrote: There are no capital gains with annuities, only ordinary income.
He means there are capital gains realized within the annuity but when they come out they are taxed as ordinary income.

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Trevor
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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Thu Sep 04, 2014 6:59 am

LongerPrimer wrote:Again your problem may not be with the FA who was just following the directions of the Trust administrator.
I don't think you have explain how you got this annuity other than you had it as a minor (18 or younger) :?:
It was probably the other way around with the FA giving directions and selling a product for commission :confused


Edit: I'm also doubtful that any legal action could be taken. In the most recent annuity, there is a sentence or two in the fine print that specifically warns of a "conflict of interest" because of commission sales.


BL wrote:
Edit: How exactly are long term capital gains taxed? Are the total taxable income and short term gains added first to determine their tax bracket, then long term gains are added last and taxed in their corresponding long term tax rates?
I suggest you get the paper forms on the IRS site along with instructions and do them to really understand how it works.
Both long and short term gains less losses are added to other taxable income to get the tax bracket. Then there is special calculations done on the gains to determine the tax.

There are no capital gains with annuities, only ordinary income.

Will do, and thanks for the help everyone :D
WWJD - What Would Jack Do?

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Re: Variable annuity 100k in fees help (UPDATE)

Post by 209south » Thu Sep 04, 2014 7:28 am

To the extent you consider an exchange into another annuity family, you should also look at Jefferson National...they offer a good selection of Vanguard and DFA funds at relatively low costs...I have most of my money at Vanguard, but when I chose to start a modest VA program the JeffNat product offered better investment options at lower costs...certainly worth a look.

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Re: Variable annuity 100k in fees help (UPDATE)

Post by indexmeasap » Thu Sep 04, 2014 8:25 am

Trevor wrote:Annuity: https://www.jackson.com/annuities/varia ... dc007d006f
Flat expense fee: 1%
Underlying fund expense: over 1%
Variable annuity type: non qualified (cannot be rolled over to anything besides another annuity)
Cost basis: 250k
Current value: 480k
Surrender fees? Yes, for the next 4 years and 3 months
Surrender free withdrawals: 45k every contract year, meaning the number will reset in 3 months from now.
I want to avoid additional surrender charges....
Double check your 45K surrender free amount with a Jackson customer service rep. Also, do you have the Liquidity Option on the contract??

Refer to pg. 28 (or pg. 62 or 646 of PDF) of the Access Elite perspectus:
...you may withdraw the following with no withdrawal charge:
- Premiums that are no longer subject to a withdrawal charage (does not apply since you still have 4 plus years)
- earnings
- during each Contract Year 10% of Premium

I assume the Cost Basis is the initial premium that you paid into the annuity and the current value the includes the earnings. If so, you should be able to withdrawl or 1035 exchange the 230K earnings to a low cost annuity free of charges right now. Additionally, you should be able to withdrawl or 1035 exchange 10% of Premium or 25K (250K*10%) every contract year.

In the next 3 plus months you should be able to reduce the Jackson annuity value by 230K of earnings, 25K of premium now, and 25K of premium after the contract reset date - for total of 280K. This will allow you to reduce fees from the 2% you are currently paying to .50% with a low cost annuity. Or withdrawl the money, paying the 10% fee and income tax on a schedule you are comfortable with.

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Re: Variable annuity 100k in fees help (UPDATE)

Post by dickenjb » Thu Sep 04, 2014 9:22 am

indexmeasap wrote:Refer to pg. 28 (or pg. 62 or 646 of PDF) of the Access Elite perspectus:
...you may withdraw the following with no withdrawal charge:
- Premiums that are no longer subject to a withdrawal charage (does not apply since you still have 4 plus years)
- earnings
- during each Contract Year 10% of Premium

I assume the Cost Basis is the initial premium that you paid into the annuity and the current value the includes the earnings. If so, you should be able to withdrawl or 1035 exchange the 230K earnings to a low cost annuity free of charges right now. Additionally, you should be able to withdrawl or 1035 exchange 10% of Premium or 25K (250K*10%) every contract year.

In the next 3 plus months you should be able to reduce the Jackson annuity value by 230K of earnings, 25K of premium now, and 25K of premium after the contract reset date - for total of 280K. This will allow you to reduce fees from the 2% you are currently paying to .50% with a low cost annuity. Or withdrawl the money, paying the 10% fee and income tax on a schedule you are comfortable with.
Sounds promising. Good research. Again, it is not a 10% fee, it is an IRS penalty for early withdrawal. Let's try to keep our terminology correct.

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Trevor
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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Thu Sep 04, 2014 9:32 am

Thank you for the information. I do not have the extra liquidity option.



I'll try to clear up any confusion. The original annuity was purchased at 250,000 many years ago. This most recent annuity was purchased with a tax free 1035 exchange at the premium of 450,000 (10% of that so 45k each year) So I have 30,000 of earnings with this new annuity, but the entire taxable income is around 230,000. If I can transfer the earnings in addition to 10% of premium, then I should be able to transfer 30k of earnings with this contract as well as an additional 45k per contract year. So I could transfer around 120k in this single tax year because the contract year resets in 3 months. Although I would not want to take a full income tax hit for 120k in this single year if I was going to completely withdraw the money.



Hope that makes everything clear :D
WWJD - What Would Jack Do?

indexmeasap
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Re: Variable annuity 100k in fees help (UPDATE)

Post by indexmeasap » Thu Sep 04, 2014 1:21 pm

Trevor

I think I understand your situation now, I read your other post. Your exact same senario happened to my 65 year-old-mother when she lost her husband.
Trevor wrote:Financial advisors are great at taking advantage of uninformed people like me. I'm just glad I discovered Bogleheads sooner rather than later. I was completely oblivious to finances until I wised up a few months ago when I realized how much I was paying in fees.
...the large tax burden I had to pay was from rampant trading by my "advisor" in my taxable account during the recent bull market.
Have you considered filing a complaint with the Wisconsin Office of Commissioner of Insurance and FINRA? Did you sign the 1035 exchange paperwork for the 450K annuity as a minor? As others have stated in a previous post, an 18-20 year, in a 15% tax bracket has no reason to be in an differed annuity. You should have taken distriubtion to avoid the IRS 10% penalty and the advsior should have explained your options at the time. Because of your age, you might have a strong case.

I've recentely filed complaints with both agencies and could provide any assistance if you are interested. Others on this forum are extremely helpful as well. It is free to file and the agencies will do all the leg work(document request/reveiw). If nothing else becomes of it, you will learn a lot.

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Trevor
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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Thu Sep 04, 2014 2:15 pm

indexmeasap wrote:Trevor

I think I understand your situation now, I read your other post. Your exact same senario happened to my 65 year-old-mother when she lost her husband.
Trevor wrote:Financial advisors are great at taking advantage of uninformed people like me. I'm just glad I discovered Bogleheads sooner rather than later. I was completely oblivious to finances until I wised up a few months ago when I realized how much I was paying in fees.
...the large tax burden I had to pay was from rampant trading by my "advisor" in my taxable account during the recent bull market.
Have you considered filing a complaint with the Wisconsin Office of Commissioner of Insurance and FINRA? Did you sign the 1035 exchange paperwork for the 450K annuity as a minor? As others have stated in a previous post, an 18-20 year, in a 15% tax bracket has no reason to be in an differed annuity. You should have taken distriubtion to avoid the IRS 10% penalty and the advsior should have explained your options at the time. Because of your age, you might have a strong case.

I've recentely filed complaints with both agencies and could provide any assistance if you are interested. Others on this forum are extremely helpful as well. It is free to file and the agencies will do all the leg work(document request/reveiw). If nothing else becomes of it, you will learn a lot.

In Wisconsin (according to my advisor,) you need to be 21 to sign for a variable annuity and be the sole owner. When I signed the paperwork for 1035 transfer and the new annuity contract, I was 19 and I believe my mom had to co-sign for both of them. So my mom has custody of the annuity but when I'm 21 I can become the sole owner. It also mentions UTMA.

http://www.investopedia.com/terms/u/utma.asp

For the record, my inheritance has been invested with this guy for the past 10 years. My mom had no bad intentions when she co-signed the new annuity. We were just oblivious to investing and I'm sure you Bogleheads realize how easily that can be taken advantage of.



Realistically, what would happen if I filed a complaint? I will consider it.
WWJD - What Would Jack Do?

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Re: Variable annuity 100k in fees help (UPDATE)

Post by LongerPrimer » Thu Sep 04, 2014 3:43 pm

Ok, getting a better picture but still some blanks but may be enough to construct a scenario. Please correct where wrong.

In 2004, Trevor, came into an inheritance, not life insurance proceeds. In that time he was about 9-10 yo. And USA was in the bottom of 9/11 aftermath, deep into two wars that were getting worse. Interest rates had plummeted and the Fed and Pres Bush and Congress was doing all types of stimulating things ever since 9/11. Mom is custodian and tells FA that she wants to preserve and protect Trevors nheritance. FA tells Mom that there are some options: If held in stocks/bonds/MF/cash there could be some gains or losses with appropriate taxes first to Trevor and possibly to Mom. ( from Dotcom collapse to 9/11 to 2004, DS's UGMA lost close to $100k, -66%). The second option would be a high featured deferred annuity. There would be more fees than S/B/MF/cash but you won't have to watch, track, do tax filings, and worry if the FA or Trevor would gain access in an emancipation suit. Also some annuities have step ups and lockups to market downturns. Trevor would gain access at majority and if done correctly, taxes could be held to a minimum (income as a student or low income) There would be penalty for withdrawal prior to 59.5 yo of 10% of gains. However, know one knows how the markets would be or if tax laws change. The annuity would provide some guarantees to Trvor where as the S/B/MF/cash would hold limited to no guarantees.

Ten years has pass. The Annuity is out of surrender period. Trevor is 19-20, could be at financial majority, emancipated, responsible with his other money's. FA offers the same scenario as 10 yrs ago with possibly even better featured annuities. Trevor other assets have also done well in the 10 yrs and he doesn't immediately need the proceeds. Trevor still can access 10% of annuity without surrender charges but will suffer the 10% premature withdrawal federal penalty and any taxes as ordinary income.

The Aanuity 10 years ago was a reasonable choice then. The new annuity may be better than old annuity and again may be a reasonable choice

Trevor needs to do some tax planning and do a spread sheet of various scenarios. Trevor will need to spend some money to see an tax specialist, which could run him into a few of thousands. He could get himself a tax program (free) and do the tax implications himself.

IMO, I'd say congratulations. The annuities did their job. You are not broke. The annuity protected your fortune so that today you have a fortune to do fully take control of your future.

GL :beer
Last edited by LongerPrimer on Thu Sep 04, 2014 3:54 pm, edited 1 time in total.

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Re: Variable annuity 100k in fees help (UPDATE)

Post by indexmeasap » Thu Sep 04, 2014 3:51 pm

Trevor wrote:Realistically, what would happen if I filed a complaint?
You will get a written response from the investment firm, while FINRA and WI OCI will review your complaint. You will get a written response from both agenices on their findings, if a violation is found, it will be posted on the advisor's public record. The OCI might suspend the broker's annuity licence for a few months. Since your mom co-signed for you, there might not be that can be done (you sign your life away with those documents agreeing to everything). Additionally, filing complaints with those agencies aren't really setup to recover monetary damages, just to site rule violations for public record.

However, because of your age at the time (19) and tax status, the annuity sale might of been unsuitable, since you lost liquidity until the age of 59 1/2. There might be a chance you could avoid paying the 10% IRS penalty. Maybe others could weight in on what to reasonable expect.

Additionally, the FINRA investigator will look into other components of how the advisor managed the portfolio. Its worth a shot, you don't have to hire a lawyer or pay anything to file.

P.S. you stated in the OP the underlying fund expenses were over 1%. Have you considered changing the sub-account allocation to JNL/Mellon S&P 500 Index fund and Capital Bond index funds while you wait out the surrender period? There expense ratios are 0.56% and 0.57%. Be aware of any fees involved to change sub-account funds, I think it should be worth it though.

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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Thu Sep 04, 2014 4:58 pm

Ok, getting a better picture but still some blanks but may be enough to construct a scenario. Please correct where wrong.

In 2004, Trevor, came into an inheritance, not life insurance proceeds. In that time he was about 9-10 yo. And USA was in the bottom of 9/11 aftermath, deep into two wars that were getting worse. Interest rates had plummeted and the Fed and Pres Bush and Congress was doing all types of stimulating things ever since 9/11. Mom is custodian and tells FA that she wants to preserve and protect Trevors nheritance. FA tells Mom that there are some options: If held in stocks/bonds/MF/cash there could be some gains or losses with appropriate taxes first to Trevor and possibly to Mom. ( from Dotcom collapse to 9/11 to 2004, DS's UGMA lost close to $100k, -66%). The second option would be a high featured deferred annuity. There would be more fees than S/B/MF/cash but you won't have to watch, track, do tax filings, and worry if the FA or Trevor would gain access in an emancipation suit. Also some annuities have step ups and lockups to market downturns. Trevor would gain access at majority and if done correctly, taxes could be held to a minimum (income as a student or low income) There would be penalty for withdrawal prior to 59.5 yo of 10% of gains. However, know one knows how the markets would be or if tax laws change. The annuity would provide some guarantees to Trvor where as the S/B/MF/cash would hold limited to no guarantees.

Ten years has pass. The Annuity is out of surrender period. Trevor is 19-20, could be at financial majority, emancipated, responsible with his other money's. FA offers the same scenario as 10 yrs ago with possibly even better featured annuities. Trevor other assets have also done well in the 10 yrs and he doesn't immediately need the proceeds. Trevor still can access 10% of annuity without surrender charges but will suffer the 10% premature withdrawal federal penalty and any taxes as ordinary income.

You know, you described my investment history better than I could :sharebeer You guys are really good.

The Aanuity 10 years ago was a reasonable choice then. The new annuity may be better than old annuity and again may be a reasonable choice

I agree. The old annuity (Hartford Director) was closing it's doors to new investors and trying to get rid of existing contracts. I don't think it was completely unreasonable to transfer to a new annuity contract at that time. Clearly, I could have chosen a better company. But now I need to decide between transferring to a lower cost annuity or withdrawing the money completely and paying about 100k in taxes the next few years. I've been leaning towards the latter.
IMO, I'd say congratulations. The annuities did their job. You are not broke. The annuity protected your fortune so that today you have a fortune to do fully take control of your future.

I was thinking the same thing. Certainly I made more money than if it was sitting in a bank account those 10 years, even though I have to deal with a tax headache now.


P.S. you stated in the OP the underlying fund expenses were over 1%. Have you considered changing the sub-account allocation to JNL/Mellon S&P 500 Index fund and Capital Bond index funds while you wait out the surrender period? There expense ratios are 0.56% and 0.57%. Be aware of any fees involved to change sub-account funds, I think it should be worth it though.
Good thinking, I will look into it :thumbsup
WWJD - What Would Jack Do?

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Re: Variable annuity 100k in fees help (UPDATE)

Post by LongerPrimer » Thu Sep 04, 2014 9:40 pm

First thank your Mom and FA.

Second sit down with the FA and find out what was the reasoning for the dVA. Why not the alternatives? Think about the reasonings before you attrack the fee structures. Read the following and think about it:http://www.nytimes.com/2013/07/13/your- ... d=all&_r=0

Third, learn the rule of 72 The FA can explain it. See if you can grasp it in different ways.

Fourth cultivate legal advice. Because you will need some legal advice because of your wealth.

Fifth,Learn about taxes and accounting. The legal, tax, accounting fees will dwarf the FA fees.

Sixth. Don't blow it, :beer

GL :moneybag :moneybag

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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Sun Sep 07, 2014 8:58 am

Bumping this thread one last time to see if anyone else has advice to offer. Big thanks to everyone who already has :sharebeer
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Re: Variable annuity 100k in fees help (UPDATE)

Post by pkcrafter » Sun Sep 07, 2014 10:33 am

Trevor, if you have any additional specific questions, just ask and we can address them one at a time. I'm getting the feeling you aren't clear on how to proceed, so maybe what you need to focus on is creating a plan.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Sun Sep 07, 2014 11:16 am

Right. After doing the math and looking at all my options, I believe the best choice of action is to withdraw everything from my variable annuity and pay an estimated 100k in taxes over the next few years.


But I guess my main concern is with paying the taxes. Let's say that I decide to withdraw 75k from my annuity in this tax period, all of it surrender free, but with income taxes and 10% early penalty owed on the entire amount. I've used income tax calculators and estimated that I would owe around 23k (including the 10% penalty) for withdrawing 75k.


What's the best course of action for paying these taxes? Could I pay the 10% penalty (7500) as soon as I withdraw the money because I know what the exact amount is? Should I just set aside 25k in a bank account and wait until it's time to pay taxes?
WWJD - What Would Jack Do?

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Re: Variable annuity 100k in fees help (UPDATE)

Post by BL » Sun Sep 07, 2014 11:56 am

I think you may need a tax adviser (not just a tax preparer) to work with you on this before you sell anything. There are differences on the tax prepayment requirements on high incomes. (For lower incomes, if you withhold at least as much as you were taxed the previous year, you wouldn't owe penalties, only the actual tax owed, called Safe Harbor, I think.) There may be withholding or estimated taxes due on large sums.

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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Sun Sep 07, 2014 1:21 pm

Here's what the withdrawal form looks like. I agree, I might need some professional tax assistance.



Image
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Re: Variable annuity 100k in fees help (UPDATE)

Post by Penguin » Sun Sep 07, 2014 2:12 pm

Here are some of the safe harbor rules (for tax year 2013) that protect you from paying a penalty on under withholding of estimated taxes.
Underpayment Penalty for 2013

If you did not pay enough tax, either through withholding or by making timely estimated tax payments, you will have an underpayment of estimated tax and you may have to pay a penalty.

Generally, you will not have to pay a penalty for 2013 if any of the following apply.

The total of your withholding and estimated tax payments was at least as much as your 2012 tax (or 110% of your 2012 tax if your AGI was more than $150,000, $75,000 if your 2013 filing status is married filing separately) and you paid all required estimated tax payments on time.

The tax balance due on your 2013 return is no more than 10% of your total 2013 tax, and you paid all required estimated tax payments on time.

Your total 2013 tax minus your withholding and refundable credits is less than $1,000.
In most cases if you pay at least as much tax during the year (estimated taxes plus withholding) as you paid for the previous year then there will be no penalty. Even if there is a penalty it is very small, perhaps 3% of the under withheld amount.
Jon

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Re: Variable annuity 100k in fees help (UPDATE)

Post by LongerPrimer » Sun Sep 07, 2014 3:06 pm

Refresh me.
You also have a spending account of 500k. It is unrestricted.
You education (college) paid for and is other than the unrestricted spending account.
You now want to move the annuity to something else, that has lower fees.
:confused

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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Sun Sep 07, 2014 3:19 pm

LongerPrimer wrote:Refresh me.
You also have a spending account of 500k. It is unrestricted.
You education (college) paid for and is other than the unrestricted spending account.
You now want to move the annuity to something else, that has lower fees.
:confused

That's accurate except I'm not really "moving" the annuity, I want to completely withdraw from it and invest it with the rest of my taxable investments
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Re: Variable annuity 100k in fees help (UPDATE)

Post by BL » Sun Sep 07, 2014 5:53 pm

. Certainly I made more money than if it was sitting in a bank account those 10 years, even though I have to deal with a tax headache now.
You don't have to deal with the tax headache now if you don't choose to do so.
The fact that you only want 5% in bonds makes me think that you may still be too young to do this yet. The general recommendation is at least 20% bonds and anywhere between 20 and 50% might be reasonable for someone in your position. Even though you may have the Ability to take the risk, you don't have the Need. If you don't screw this up, you are set for life.

How and where do you have all of your other investments that you have access to already? If these are also in essentially all stocks, you may be in the difficult situation of loosing half of your inheritance when stocks crash.

Have you checked out Windfalls?
http://www.bogleheads.org/wiki/Windfalls
and this page from there:
http://www.bogleheads.org/wiki/Financia ... t_the_plan

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Re: Variable annuity 100k in fees help (UPDATE)

Post by Trevor » Sun Sep 07, 2014 6:19 pm

BL wrote:
. Certainly I made more money than if it was sitting in a bank account those 10 years, even though I have to deal with a tax headache now.
You don't have to deal with the tax headache no if you don't choose to do so.
The fact that you only want 5% in bonds makes me think that you may still be too young to do this yet. The general recommendation is at least 20% bonds and anywhere between 20 and 50% might be reasonable for someone in your position.

How and where do you have all of your other investments that you have access to already? If these are also in essentially all stocks, you may be in the difficult situation of loosing half of your inheritance when stocks crash.

For my taxable investments I have 300k invested with Vanguard into VTSAX and VTIAX, and I have about 50k (and counting) invested into Lending Club which is a P2P loan website. I will consider a 10% bond allocation but don't want to go much higher than that, considering that I am still allocating more to Lending Club as well.


Thanks for the links.
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Re: Variable annuity 100k in fees help (UPDATE)

Post by LongerPrimer » Sun Sep 07, 2014 11:46 pm

So does the new variable annuity have setups and lockups or is it a plain Jane VA?

You would be ill advise to close the entire annuity without doing periodic annual, surrender fee free program. Be aware that the original annuity was setup to make it difficult for you to access. You got a bonus in that it did well, as did your preferred accounts. :)

We don't know you, but I and my wife stipulated, that if we were to die early, our Only would not get his remainder 50% until age 30. The Only is very accomplished and responsible, but 30 is the date that most of his brain are functioning together. Not a day sooner. :annoyed

GL
:confused

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