Flexible Annuity options

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1year23
Posts: 31
Joined: Fri Apr 01, 2016 8:31 am

Flexible Annuity options

Post by 1year23 » Mon Apr 04, 2016 10:19 am

Wow I just found this site a couple of weeks ago and I am so impressed by the responses and the generosity of posters to spend their time giving nuanced and sophisticated answers to us newbies. :D :D My question involves a Riversource Flexible Portfolio Annuity that I bought over 30 years ago. It was a one time investment of $6000 and it has grown to around $58,000 now. I don't need the money now but thanks to all of you I investigated the expenses associated with this and the 2 sub accounts have a .87 and a .67 ER along with a 1.25% annual fee. Ouch!!!
The majority of my other money, taxable and IRA, is at Fidelity. I was told by Fidelity I could transfer this annuity over to them with a 1035 exchange form, reinvest in one of their sub accounts with a ER of .10 and a yearly .25 annuity charge. There are many funds to chose from and I am looking at Fidelity VIP Index 500. I know now, that I should avoid these type of annuities, but the load etc was a long time ago and my surrender charge at this point is minimal. My question to you is: should I transfer this over to Fidelity for the lower expenses? I am in the 39% tax bracket and will be retiring in a few years so my thinking is that I don't want to create a taxable event by cashing out of this BUT I don't want to pay the Riversource fees anymore. Is there something else I can do with this money that is better than getting back into a flexible annuity?

Any advice is much appreciated.

1year23
Posts: 31
Joined: Fri Apr 01, 2016 8:31 am

Re: Flexible Annuity options

Post by 1year23 » Mon Apr 04, 2016 11:26 am

why isn't anyone responding?

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BL
Posts: 8395
Joined: Sun Mar 01, 2009 2:28 pm

Re: Flexible Annuity options

Post by BL » Mon Apr 04, 2016 11:27 am

I would also check on annuities through Vanguard which I have heard good things about. Have not used any of them myself.

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powermega
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Location: Colorado

Re: Flexible Annuity options

Post by powermega » Mon Apr 04, 2016 11:50 am

Welcome to the site 1year23! I hope you find this place to be the wealth of information and wisdom I have found it to be.

I think you have the right general idea. A 1035 exchange into a better variable annuity would be the best choice for you. Surrendering the existing policy and realizing the taxable income would not be a good decision in your tax bracket.

That Fidelity annuity sounds like a good one. It might be nice to have your variable annuity at the same custodian just for simplicity. Vanguard (among others) offers some low-cost annuities too, so it's worth shopping around. You should try to find a variable annuity with the lowest cost and no other frills or riders. Eventually, you could do another 1035 exchange into a SPIA, which would give you a guaranteed monthly income and spread out the tax basis over your remaining life expectancy. That income could be used for some basic expenses in retirement.

As for investments, you could manage the annuity like you would any other tax-deferred account like a 401k or traditional IRA. Some people who buy variable annuities are looking for more tax-deferred space, especially for investments that are not tax efficient, like REITs and bonds. Investing in bond funds in this variable annuity could also allow you to be a little more aggressive in your personal IRAs too, if you want to tinker with things like that. I prefer broader market index funds myself, but the S&P 500 index fund would be perfectly appropriate too.
Even a stopped clock is right twice a day.

1year23
Posts: 31
Joined: Fri Apr 01, 2016 8:31 am

Re: Flexible Annuity options

Post by 1year23 » Mon Apr 04, 2016 12:19 pm

Thank you so much!! :D

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Cyclesafe
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Re: Flexible Annuity options

Post by Cyclesafe » Mon Apr 04, 2016 2:56 pm

Your $52k of gains will incur full income tax before you get tax-free access to your $6k basis. The only two ways you can get your money are to withdraw or to annuitize. For the former, you pay full income tax until you get to your basis. For the latter, you pay full income taxes on a portion (in your case a majority) of your payment. You can get a fixed period annuity or a life-time annuity, both in any number of flavors.

The first step, however, is to reduce costs. I can't speak for Fidelity, but Vanguard's full-in fees range from ~.48-.75% depending on what sub-accounts you choose. Make certain when comparing plans that you ae comparing apples to apples.

These annuity products were reasonable alternatives to holding in taxable back in the days when dividends and LTCG's received no special tax treatment (prior to 2002, IIRC). For a long time, however, its been a stretch, usually quite a stretch to justify them vs just holding index equity in taxable. Bonds and REIT's, as previously mentioned, should go in them if they already have been established.

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