Roth IRA Index Annuity

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GridironGems
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Roth IRA Index Annuity

Post by GridironGems »

I have part of this question in my original thread, but would like to make this a separate thread.

I'm 31 years old and last April put in $11,000 into a Roth IRA for 2015 and 2016. I did not know any better at the time, and my financial advisor put me into a Flexible Premium Deferred Indexed Annuity with Lafayette Life Insurance Company.
Last year it earned 3.52% and it currently sits at $11,396.33
I am going back and forth on determining if I should pay the 9% penalty and have it transferred to Vanguard Roth IRA Target Retirement Fund 2050.
I would take a hit of $926.19 and remaining balance would be $10,470.14
So I would lose $529.86 from my original $11,000 investment

As each year passes, the surrender fee drops 1% so next year it'd be 8% and so on.

Another option is a 10% Free Withdrawal Amount Available, which is $1,105.31 , So I could move this amount as well

On one hand, I'd like to stay the course and consider this as part of my bond portion of my portfolio and use this as a reference to my other funds
On the other hand, I am young and the Target Retirement Fund could pass this Index Annuity in a few years and grow much more there after

Thoughts? Keep it there or transfer it to Vanguard?
Dottie57
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Re: Roth IRA Index Annuity

Post by Dottie57 »

Get out of the annuity and invest in what you want to invest. The annuity is a stinker so why keep it around.
itstoomuch
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Re: Roth IRA Index Annuity

Post by itstoomuch »

I'd look to see if this is "appropriate" for someone of your age.
I'd consider going to the state's insurance commission and make a complaint on the annuity company and on the agent.
You've probably been had, bad.
A FI Annuity should never be done on a Roth, an IRA maybe, but Never on a Roth.

Disclaimer we have FI annuity in an IRA, age 70, and will begin 1st qualified GLWB withdrawal next month.
I am not versed enough to give recommendations to exit this contract. We were already in retirement at our purchase and knew when we were going to take withdrawals.
YMMV

So what was the reason for using a FI annuity? and in a Roth?
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Nate79
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Re: Roth IRA Index Annuity

Post by Nate79 »

I surely hope you have learned your lesson and stopped talking to your salesman, err I mean financial "advisor." This joker only has his boat payment in mind.
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BL
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Re: Roth IRA Index Annuity

Post by BL »

Stay away from insurance companies for investing. Except for term life and perhaps disability, avoid all contact with those agents.

Do your investing with low-ER index funds at one of the sources mentioned here such as Vanguard, Fidelity, and a few more.

Agree that there should be no annuity in a Roth IRA.
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celia
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Re: Roth IRA Index Annuity

Post by celia »

I think your "advisor" is a bigger problem than the annuity. Do you have to use an advisor at this brokerage/investment company or can you do-it-yourself?

How about moving the 10% out that you can do each year. Then find out the date the surrender penalty drops to 8%. At that time, move the rest to another brokerage/investment company. Just an idea to save on fees.

And don't waste Roth space like that. You should put the assets you expect to grow the most into your Roth. If you "have to" have such an annuity, use your tax-deferred space for it. (See my signature line.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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FiveK
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Re: Roth IRA Index Annuity

Post by FiveK »

There is no unambiguously correct answer, because you would need to know the future to provide one.

Don't compare what would happen vs. your original investment - that is in the unchangeable past. Look only to what might happen going forward.

Do you know the exact formula used to go from the index performance to your interest rate? It might look something like
A = S&P 500 Composite Stock Price Index average for year
B = S&P 500 Composite Stock Price Index 1 year ago
C = Asset Fee Rate
D = Prior Account value
E = Participation rate
Interest rate = (A/B -1) * E - C
Interest = Interest rate * D

Also note the "price index" ignores dividends you would receive if invested in an actual index fund, so that's another ~2% off the top.

Unfortunately 9% may be too much to pay - but you could throw the annuity interest formula into Excel and compare for yourself.

And yes, as celia suggested, do take out whatever penalty-free amount you can each year.
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David Jay
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Re: Roth IRA Index Annuity

Post by David Jay »

FiveK wrote: Wed Aug 30, 2017 10:06 amDon't compare what would happen vs. your original investment - that is in the unchangeable past. Look only to what might happen going forward.
^^^ This!

The cost of the annuity is a sunk cost - you can't get it back. They took that money and paid the salesman with it. You can take the hit now, or take the hit every year for the next 9 years. Your choice, but don't think for a second that you will "recover" any of that 9% by waiting.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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David Jay
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Re: Roth IRA Index Annuity

Post by David Jay »

Didn't find the prospectus, but I did find a summary here: http://www.annuityadvisors.com/forms/la ... ummary.pdf

It uses the SP500 index (as most of us know, NOT SP500 total return) and has a MONTHLY cap. There is no monthly downside protection, any monthly drop is included in the annual average. Each month's value is then combined at the end of the year. Of course the summary does not tell you what the monthly cap is and does not tell you the fees associated with the product.

[edit] What this means is that if the SP goes up 5% in a month, you are credited with the cap amount (probably 1.x%). If it goes down 5% in a month you are dinged for the full 5%. After 12 months, they add up the monthly changes, divide by 12 and that is your gain for the year. But not less than zero...
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
deltaneutral83
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Re: Roth IRA Index Annuity

Post by deltaneutral83 »

David Jay wrote: Wed Aug 30, 2017 11:25 am Didn't find the prospectus, but I did find a summary here: http://www.annuityadvisors.com/forms/la ... ummary.pdf

It uses the SP500 index (as most of us know, NOT SP500 total return) and has a MONTHLY cap. There is no monthly downside protection, any monthly drop is included in the annual average. Each month's value is then combined at the end of the year. Of course the summary does not tell you what the monthly cap is and does not tell you the fees associated with the product.

[edit] What this means is that if the SP goes up 5% in a month, you are credited with the cap amount (probably 1.x%). If it goes down 5% in a month you are dinged for the full 5%. After 12 months, they add up the monthly changes, divide by 12 and that is your gain for the year. But not less than zero...
That's pretty ingenious on the part of the insurance company. Does the annuity provider sum up the product as "Head's I win, tails you lose."
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David Jay
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Re: Roth IRA Index Annuity

Post by David Jay »

deltaneutral83 wrote: Wed Aug 30, 2017 1:28 pm
David Jay wrote: Wed Aug 30, 2017 11:25 am Didn't find the prospectus, but I did find a summary here: http://www.annuityadvisors.com/forms/la ... ummary.pdf

It uses the SP500 index (as most of us know, NOT SP500 total return) and has a MONTHLY cap. There is no monthly downside protection, any monthly drop is included in the annual average. Each month's value is then combined at the end of the year. Of course the summary does not tell you what the monthly cap is and does not tell you the fees associated with the product.

[edit] What this means is that if the SP goes up 5% in a month, you are credited with the cap amount (probably 1.x%). If it goes down 5% in a month you are dinged for the full 5%. After 12 months, they add up the monthly changes, divide by 12 and that is your gain for the year. But not less than zero...
That's pretty ingenious on the part of the insurance company. Does the annuity provider sum up the product as "Head's I win, tails you lose."
Clearly, this formula has no chance of gains in a turbulent market because of the unlimited downside.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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David Jay
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Re: Roth IRA Index Annuity

Post by David Jay »

I found the monthly cap, 1.4% here: http://www.annuityadvisors.com/Forms/la ... -sheet.pdf

Guaranteed payout is 87.5% of total premiums, so you can have zero gains (and still pay fees) and end up under-water with this product.

Still can't find a prospectus, so I don't know the fees. Typical fees for these types of products are about 2% (which is why GridironGems shouldn't delay getting out. You get 1% more every year from less early withdrawal penalty but pay ~2% every year in fees).
Last edited by David Jay on Wed Aug 30, 2017 2:21 pm, edited 2 times in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Alan S.
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Re: Roth IRA Index Annuity

Post by Alan S. »

So it is now evident why the industry changed the name of these products from "equity indexed annuity" to "fixed index annuity". Equity indexed annuities quickly earned a bad reputation resulting in a name change.

It appears they are now aptly named. The fix is in. :annoyed
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David Jay
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Re: Roth IRA Index Annuity

Post by David Jay »

I think an illustration of impact of the monthly cap is in order -

For the year, the SP500 index is up 6%, with the following monthly changes:
+3%, -2%, +3%, -2%, +3%, -2%, +3%, -2%, +3%, -2%, +3%, -2%,

If you own an SP500 index fund, you get 6% capital gain + 1.8% dividends so for the year you are up 7.8%

If you own this annuity, you get nothing: (1.4*6) + (-2*6) / 12 = (-0.3%) so credited as 0
But you still pay your annual fee of, say, 2% so your balance goes down 2%

[edit] This is only an illustration, no actual returns were harmed in the creation of this illustration.
Last edited by David Jay on Wed Aug 30, 2017 10:04 pm, edited 1 time in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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GridironGems
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Re: Roth IRA Index Annuity

Post by GridironGems »

It seems like all of you recommend I get out of this thing. My anniversary date is April 1st, so that is when my total amount would jump up (I do not see much change all year until my anniversary date, then it all gets put in) and my fee would go down.

So what was the reason for using a FI annuity? and in a Roth?

I help out a retired professor whom has had this financial advisor forever, so I just know him through the professor. Last year I did not know anything about investing and let him do it. He asked me questions, which he probably already knew the answer to (like do I want to lose money, etc) nobody wants to lose money, so of course I said no. He would talk and try to make me scared of the market. He is an older guy and conservative so doesn't like stocks.

I think your "advisor" is a bigger problem than the annuity. Do you have to use an advisor at this brokerage/investment company or can you do-it-yourself?

No, he is just a local guy. I would move it all to Vanguard and do it myself

Still can't find a prospectus, so I don't know the fees. Typical fees for these types of products are about 2% (which is why GridironGems shouldn't delay getting out. You get 1% more every year from less early withdrawal penalty but pay ~2% every year in fees).

I do not know of any fees. I put in 11,000 and none of that was taken out for fees, unless they were hidden fees and my 3.52% I earned was actually more than that.

If you own this annuity, you get nothing: (1.4*6) + (-2*6) / 12 = (-0.3%) so credited as 0
But you still pay your annual fee of, say, 2% so your balance goes down 2%


I cannot lose money on this. 0% is the lowest I can get. Last year the market was really good, so 3.52% may be about the best I could do. I would assume it'd always be between 0-4% each year
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David Jay
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Re: Roth IRA Index Annuity

Post by David Jay »

GridironGems wrote: Wed Aug 30, 2017 6:03 pmI cannot lose money on this. 0% is the lowest I can get. Last year the market was really good, so 3.52% may be about the best I could do.
The summary from Lafayette Life (follow the link above) clearly states that the guaranteed return is 87.5% of the total premiums, so it is clear that you CAN lose money. Otherwise there is no reason to declare that minimum. The ability to lose 1.25% per year (12.5% in 10 years) suggests to me that 1.25% is the annual fee.

The reason is that there ARE fees (though not disclosed to you). They will be listed in the prospectus. I believe that they were required to provide the prospectus to you so you can look it up but I suspect (see above) that the annual fee is 1.25%.

I agree that the "return can't be less than zero" on the index. I read the entire product summary. The way this works is that if your index return is less than the fees in a given year then the return will be negative (you will lose policy value). If the market takes a nose-dive and the index return is 0 then you will lose 1.25% (if my guess above about the fee amount is correct) in that year.
Last edited by David Jay on Wed Aug 30, 2017 9:56 pm, edited 1 time in total.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
GridironGems
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Re: Roth IRA Index Annuity

Post by GridironGems »

Ah ok, I was not aware of that. Even more reason to get rid of it and go into Vanguard now
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FiveK
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Re: Roth IRA Index Annuity

Post by FiveK »

David Jay wrote: Wed Aug 30, 2017 9:02 pm
GridironGems wrote: Wed Aug 30, 2017 6:03 pmI cannot lose money on this. 0% is the lowest I can get. Last year the market was really good, so 3.52% may be about the best I could do.
The summary from Lafayette Life (follow the link above) clearly states that the guaranteed return is 87.5% of the total premiums, so it is clear that you CAN lose money.
Perhaps not. It depends on how these terms are defined in the contract.

For example, the word "return" (if the search function is credible) doesn't appear in either S&P 500 (SP) Option Volatility Analysis - rate-sheet.pdf or Marquis-Centennial-7-&-10-Product-Summary.pdf.

There is a Minimum Guaranteed Surrender Value (or Guaranteed Minimum Surrender Value) described as:
  • The guaranteed minimum surrender value of your contract
    will be 87.5% of all net premiums (less any withdrawals)
    accumulated at 1%–3% interest. The interest rate will be
    determined at policy issue and will remain fixed through
    the withdrawal charge period.
As described in the link immediately above, "...the annuity purchaser is still protected by the Minimum Guaranteed Surrender Value of 87.5% of the premiums paid accumulated at [some] interest (which accumulates to the point where a return of premiums paid would occur in [some] contract year)."

Other than the surrender fees, I believe GridironGems is correct to believe one "cannot lose money on this" - much as one "cannot lose" by hiding money under a mattress - and there is no annual fee per se.
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GridironGems
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Re: Roth IRA Index Annuity

Post by GridironGems »

I'm thinking about taking the 10% free withdrawal and waiting till my April 1 anniversary date. Most of the money goes into my account on that date, so my total value has not changed much since April. I'm not sure if that means I will be able to take out another 10% free on April 1, or how that works exactly. But if I am, then I would do that, and then pay a 8% fee and transfer the rest to Vanguard.
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Re: Roth IRA Index Annuity

Post by itstoomuch »

JMO
Take your losses now.
From our experience in FIa, one can only come out of this in a narrow band of circumstances that mostly involve being close to or being in retirement.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
mickroark
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Re: Roth IRA Index Annuity

Post by mickroark »

I would keep the annuity because these index annuities are good long term investments. I own one myself but not in a Roth. You must remember that these are long term investments and I mean long term. 12 to 16 years. Otherwise you lose in the short term by paying the surrender charges. The insurance company needs the money long term to get you what you want.
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Re: Roth IRA Index Annuity

Post by wcombat1911 »

My father had a similar Roth IRA annuity with 10k initially invested. By the time he asked me to help him get his portfolio in order the annuity was on its 4th year. I waited to the anniversary date and had vanguard handle the transfer. Surrender charges ended up being about $500. It sucks to lose some of the money but better to cut losses sooner than later IMO.
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FiveK
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Re: Roth IRA Index Annuity

Post by FiveK »

mickroark wrote: Sat Sep 02, 2017 9:41 am I would keep the annuity because these index annuities are good long term investments. ...
You must remember that these are long term investments and I mean long term. 12 to 16 years.
Can't tell if this is sarcasm. If not, please define what you mean by "good".
Otherwise you lose in the short term by paying the surrender charges.
This part is true, leaving the purchaser two unattractive options: stay with an investment likely to underperform reasonable alternatives, or take a guaranteed short term hit via the surrender charge.
The insurance company needs the money long term to get you what you want.
Again, can't tell if this is sarcasm....
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Re: Roth IRA Index Annuity

Post by CedarWaxWing »

mickroark wrote: Sat Sep 02, 2017 9:41 am I would keep the annuity because these index annuities are good long term investments. I own one myself but not in a Roth. You must remember that these are long term investments and I mean long term. 12 to 16 years. Otherwise you lose in the short term by paying the surrender charges. The insurance company needs the money long term to get you what you want.
In what way are they good long term investments, in comparison to anything else or simply low cost mutual funds?

https://www.wsj.com/articles/a-new-warn ... 1433526309

https://www.google.com/search?sitesearc ... +annuities
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