Annuity in SIMPLE IRA

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c8n
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Annuity in SIMPLE IRA

Post by c8n » Thu Jan 18, 2018 10:43 pm

I’m having a bit of trouble figuring out what the best plan of action is here for me. My new employer offers a 3% match SIMPLE IRA. I am still waiting to find out if this is a 5304 or 5305 IRA, as it’s not listed on the forms, but I believe it is a 5305. Assuming that’s the case, the only options I have within that account is a Northwester Mutual RR Series Select Variable Annuity with one of 5 asset allocation models. It lists a total annual expense percent average of 2.03%, which seems crazy high to me.

If this turns out to be 5304, I will take this directly to Vanguard, but if this annuity is my only option, is it still sensible to take advantage of the 3% match? I’ve got a Roth IRA at Vanguard as well.

Thanks for any suggestions or advice!

krow36
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Re: Annuity in SIMPLE IRA

Post by krow36 » Fri Jan 19, 2018 12:11 am

c8n wrote:
Thu Jan 18, 2018 10:43 pm
I’m having a bit of trouble figuring out what the best plan of action is here for me. My new employer offers a 3% match SIMPLE IRA. I am still waiting to find out if this is a 5304 or 5305 IRA, as it’s not listed on the forms, but I believe it is a 5305. Assuming that’s the case, the only options I have within that account is a Northwester Mutual RR Series Select Variable Annuity with one of 5 asset allocation models. It lists a total annual expense percent average of 2.03%, which seems crazy high to me.

If this turns out to be 5304, I will take this directly to Vanguard, but if this annuity is my only option, is it still sensible to take advantage of the 3% match? I’ve got a Roth IRA at Vanguard as well.
That sounds crazy to me also! Can you post a link to the options that you have? If the SIMPLE is a 5305, you will be able to transfer your contributions over to a Vanguard "frozen" SIMPLE account, monthly if desired, so you wouldn't be paying those high fees on a very high balance. Your employer's 3% match will help some.

If it's a 5304, Vanguard will require that your employer complete Vanguard's form that sets up the employer's SIMPLE IRA, even though you may be the only employee using Vanguard. So you'll need your employer's cooperation for that.

I'm going to check on annuities in SIMPLE IRAs?? I didn't know it was possible. :(
Edit: It seems that it's allowed, unfortunately.
Last edited by krow36 on Fri Jan 19, 2018 12:45 am, edited 1 time in total.

TravelforFun
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Re: Annuity in SIMPLE IRA

Post by TravelforFun » Fri Jan 19, 2018 12:19 am

c8n wrote:
Thu Jan 18, 2018 10:43 pm
I’m having a bit of trouble figuring out what the best plan of action is here for me. My new employer offers a 3% match SIMPLE IRA. I am still waiting to find out if this is a 5304 or 5305 IRA, as it’s not listed on the forms, but I believe it is a 5305. Assuming that’s the case, the only options I have within that account is a Northwester Mutual RR Series Select Variable Annuity with one of 5 asset allocation models. It lists a total annual expense percent average of 2.03%, which seems crazy high to me.

If this turns out to be 5304, I will take this directly to Vanguard, but if this annuity is my only option, is it still sensible to take advantage of the 3% match? I’ve got a Roth IRA at Vanguard as well.

Thanks for any suggestions or advice!
Your employer gives you 3% and Northwestern takes 2.03% of what you and your employer put in. No thanks. I'm not interested.

TravelforFun

krow36
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Re: Annuity in SIMPLE IRA

Post by krow36 » Fri Jan 19, 2018 12:56 am

You should fund your traditional or Roth IRA first, and then contribute as much as possible to the expensive SIMPLE IRA. Putting up to 12.5k plus 3% of your wages in a tax-deferred account is a lot better than saving in a taxable account. Remember that many 401k and 403b plans have high expenses and no match. And their money cannot be moved out until age 59.5 or they quit. You are much better off because you can move your money out to a low-cost providor.

A SIMPLE IRA has to be renewed every year (before Nov 2), so maybe you can talk your employer in to using a low-cost providor such as Vanguard or Fidelity for next year?

c8n
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Re: Annuity in SIMPLE IRA

Post by c8n » Fri Jan 19, 2018 5:48 pm

Thanks for all of the advice here so far.

As far as posting the options, other than asset allocations and the overall fees, I’m not even exactly sure of the guarantees/fees/etc. They seem to have set this up to be as opaque and confusing as possible.

I have also found out that this is a 5305, so I’m stuck sending the money to Northwestern Mutual first. I can’t find much information on how I would transfer this to a “frozen” SIMPLE account though—is this something I can start doing immediately, or is that something I can just plan for down the line? Because the money is in an annuity, it makes me think I can’t actually transfer money out of it without some expensive fees.

I am thinking it still makes sense to do the 3% contribution with 3% match, even though it philosophically bothers me, as the net 1% contribution from my employer is still not so terrible.

krow36
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Re: Annuity in SIMPLE IRA

Post by krow36 » Fri Jan 19, 2018 7:44 pm

I wonder if it might be worthwhile talking to the employer’s Northwestern Mutual person and explaining that you plan to transfer your contributions to a mutual fund based SIMPLE IRA account?

Because you first contributed to your SIMPLE 3 years ago, you are allowed to transfer your money out of your employer-based SIMPLE IRA into an traditional IRA at another provider (Vanguard?):
https://www.irs.gov/retirement-plans/si ... tributions
Can I transfer money from my SIMPLE IRA to another retirement account?
You may be able to transfer money in a tax-free rollover from your SIMPLE IRA to:
* another IRA (except a Roth IRA), or
* an employer-sponsored retirement plan (such as a 401(k), 403(b), or governmental 457(b) plan).
However, during the 2-year period beginning when you first participated in your employer's SIMPLE IRA plan, you can only transfer money to another SIMPLE IRA. Otherwise, you’re considered to have withdrawn the amount and you must:
* include the amount in your gross income, and
* pay an additional 25% tax on this amount (unless you qualify for an exception (see above)).
After the 2-year period, you can also roll over SIMPLE IRA money into a Roth IRA, but you must include it in your income.
You don’t need the frozen SIMPLE IRA account, you are allowed to use a traditional IRA instead to receive the money transferred from your employer-based SIMPLE IRA. You continue to contribute to the latter, and can do asset transfers as frequently as monthly. You should leave some in it ($200?) so that it will remain open to receive further contributions.

One possible problem could be that the IRS regs say that the financial institution may require that your intention to transfer be made known in the election period (Nov 2 to Dec 31). I don’t think it’s common for this to happen, but it could, which would force you to postpone the transfer until next year.
https://www.irs.gov/pub/irs-drop/not98-4.pdf
Q. J 2: May the time and manner in which a participant may transfer his or her balance without cost or penalty be limited without violating the requirements of § 408(p)(7)?
A. J 2: Yes. Section 408(p)(7) will not be violated merely because a participant is given only a reasonable
19
period of time each year in which to transfer his or her balance without cost or penalty. A participant will be deemed to have been given a reasonable period of time in which to transfer his or her balance without cost or penalty if, for each calendar year, the participant has until the end of the 60-day period described in Q&A E 1 to request to transfer, without cost or penalty, his or her balance attributable to SIMPLE IRA Plan contributions for the calendar year following that 60 day period (or, for the year in which an employee becomes eligible to make salary reduction contributions, for the balance of that year) and subsequent calendar years.
EDIT: Sorry but I confused this thread with another. You haven't said how long you've contributed to the SIMPLE IRA account, if ever??
Last edited by krow36 on Sat Jan 20, 2018 10:25 am, edited 1 time in total.

Spirit Rider
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Re: Annuity in SIMPLE IRA

Post by Spirit Rider » Fri Jan 19, 2018 8:14 pm

If they did not provide proper notice that this was 5305-SIMPLE and you could elect to make no cost transfers to another retirement plan. This would be grounds for insisting they allow you to elect this provision even though the election period has lapsed.

krow36
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Re: Annuity in SIMPLE IRA

Post by krow36 » Sat Jan 20, 2018 10:56 am

c8n wrote:
Fri Jan 19, 2018 5:48 pm
I can’t find much information on how I would transfer this to a “frozen” SIMPLE account though—is this something I can start doing immediately, or is that something I can just plan for down the line? Because the money is in an annuity, it makes me think I can’t actually transfer money out of it without some expensive fees.
I'm sorry for the error I made in my previous post! If you haven’t started contributing to this account, you should wait until you have several months of contributions. To then do an asset transfer to Vanguard, the first step is to fill out a SIMPLE IRA New Account form (if it has not been 2 years since first contributing). Assuming it has not been 2 years, download the Vanguard SIMPLE IRA Employee Kit.
https://personal.vanguard.com/pdf/s195.pdf?2210092770
In section 2. Plan Information, check “New frozen account”. You need a Vanguard account to download their SIMPLE IRA Asset Transfer Authorization form. Type “IRA forms” in the Vanguard Search space and you’ll find it. You can call up Vanguard and confirm how a frozen SIMPLE account works. I would call the number on Vanguard’s Small Business Plans' website: https://investor.vanguard.com/what-we-o ... Link=facet

c8n
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Re: Annuity in SIMPLE IRA

Post by c8n » Sat Jan 20, 2018 11:03 am

krow36 wrote:
Fri Jan 19, 2018 7:44 pm
I wonder if it might be worthwhile talking to the employer’s Northwestern Mutual person and explaining that you plan to transfer your contributions to a mutual fund based SIMPLE IRA account?

Because you first contributed to your SIMPLE 3 years ago, you are allowed to transfer your money out of your employer-based SIMPLE IRA into an traditional IRA at another provider (Vanguard?):
https://www.irs.gov/retirement-plans/si ... tributions
Can I transfer money from my SIMPLE IRA to another retirement account?
You may be able to transfer money in a tax-free rollover from your SIMPLE IRA to:
* another IRA (except a Roth IRA), or
* an employer-sponsored retirement plan (such as a 401(k), 403(b), or governmental 457(b) plan).
However, during the 2-year period beginning when you first participated in your employer's SIMPLE IRA plan, you can only transfer money to another SIMPLE IRA. Otherwise, you’re considered to have withdrawn the amount and you must:
* include the amount in your gross income, and
* pay an additional 25% tax on this amount (unless you qualify for an exception (see above)).
After the 2-year period, you can also roll over SIMPLE IRA money into a Roth IRA, but you must include it in your income.
You don’t need the frozen SIMPLE IRA account, you are allowed to use a traditional IRA instead to receive the money transferred from your employer-based SIMPLE IRA. You continue to contribute to the latter, and can do asset transfers as frequently as monthly. You should leave some in it ($200?) so that it will remain open to receive further contributions.

One possible problem could be that the IRS regs say that the financial institution may require that your intention to transfer be made known in the election period (Nov 2 to Dec 31). I don’t think it’s common for this to happen, but it could, which would force you to postpone the transfer until next year.
https://www.irs.gov/pub/irs-drop/not98-4.pdf
Q. J 2: May the time and manner in which a participant may transfer his or her balance without cost or penalty be limited without violating the requirements of § 408(p)(7)?
A. J 2: Yes. Section 408(p)(7) will not be violated merely because a participant is given only a reasonable
19
period of time each year in which to transfer his or her balance without cost or penalty. A participant will be deemed to have been given a reasonable period of time in which to transfer his or her balance without cost or penalty if, for each calendar year, the participant has until the end of the 60-day period described in Q&A E 1 to request to transfer, without cost or penalty, his or her balance attributable to SIMPLE IRA Plan contributions for the calendar year following that 60 day period (or, for the year in which an employee becomes eligible to make salary reduction contributions, for the balance of that year) and subsequent calendar years.
EDIT: Sorry but I confused this thread with another. You haven't said how long you've contributed to the SIMPLE IRA account, if ever??
Thanks for this information—I haven’t yet opened or contributed to the SIMPLE IRA, I was trying to determine if it’s worth doing, or if I’m wrapping up 3% of my income in something that’ll be a waste of money.

krow36
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Re: Annuity in SIMPLE IRA

Post by krow36 » Sat Jan 20, 2018 11:32 am

c8n wrote:
Fri Jan 19, 2018 5:48 pm
Because the money is in an annuity, it makes me think I can’t actually transfer money out of it without some expensive fees
The financial institution is not allowed to charge a surrender fee that most annuities have.
https://www.irs.gov/pub/irs-drop/not98-4.pdf
Q. J 4: How does a DFI transfer a participant's balance without cost or penalty?
A. J 4: In order to satisfy § 408(p)(7), a participant's balance must be transferred in a trustee-to-trustee transfer directly to a SIMPLE IRA (or, after the 2-year period described in Q&A I 2, to any IRA) at the financial institution specified by the participant.
A transfer is deemed to be made without cost or penalty
if no liquidation, transaction, redemption or termination
fee, or any commission, load (whether front-end or back-end)
or surrender charge, or similar fee or charge is imposed
with respect to the balance being transferred.
A transfer
will not fail to be made without cost or penalty merely
because contributions that a participant has elected to have
transferred without cost or penalty are required to be
invested in one specified investment option until
transferred, even though a variety of investment options are
available with respect to contributions that participants
have not elected to transfer.(underline added)
However, the FI is allowed to charge “a reasonable annual administration fee” for the transfers. Posters have not reported being charged but . . .

krow36
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Re: Annuity in SIMPLE IRA

Post by krow36 » Sat Jan 20, 2018 11:59 am

c8n wrote:
Sat Jan 20, 2018 11:03 am
Thanks for this information—I haven’t yet opened or contributed to the SIMPLE IRA, I was trying to determine if it’s worth doing, or if I’m wrapping up 3% of my income in something that’ll be a waste of money.
If all you are able to contribute is 3% in order to get the match, then the high fee almost cancels out the match and it’s may not be worth bothering with. I realize that 3% may be all that many employees can afford to contribute. Assuming that you were able to contribute enough to max out the account (12.5k per year) and also get the employer’s 3%, and you transferred it periodically to a low-cost provider, you would be much better off than trying to save in a taxable account.

If an employee only contributes 3% to their SIMPLE IRA in order to get the 3% match, the SIMPLE is failing to do what it’s designed to do—provide a significant retirement account. Your employer tried to do the right thing and provide a retirement account for his/her employees. Unfortunately the employer used an insurance agent rather than a low-cost financial institution such as Vanguard. That can be changed for 2019!

Spirit Rider
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Re: Annuity in SIMPLE IRA

Post by Spirit Rider » Sat Jan 20, 2018 12:58 pm

krow36 wrote:
Sat Jan 20, 2018 11:32 am
However, the FI is allowed to charge “a reasonable annual administration fee” for the transfers. Posters have not reported being charged but . . .
This is a misinterpretation of IRS Notice 98-4 Q&A J-4. A DFI may charge “a reasonable annual administration fee” for all participants including those who elect transfers. They can not apply an additional fee only for those electing transfers.

For example, Vanguard charges an administrative fee of $25/fund/participant/year and Fidelity charges $25/participant/year. I don't know why someone with a 5305-SIMPLE IRA at either custodian would want to transfer out. However, they can still charge this fee to those who elect to transfer, but they could not assess an additional fee.

krow36
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Re: Annuity in SIMPLE IRA

Post by krow36 » Sat Jan 20, 2018 1:30 pm

Spirit Rider, thanks for the clarification! That does make more sense.

c8n
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Re: Annuity in SIMPLE IRA

Post by c8n » Tue Jan 23, 2018 7:00 am

Quick update, I found out the plan actually is a 5304. However, NWM told our admin that “because of the way the plan is setup,” that the only option is to go through NWM.

Additionally, I cannot seem to discern any additional benefits that the annuity offers (e.g., a death benefit, or anything like that). It seems like this is mostly in an annuity to make it easier to charge various fees on the account.

I’m not sure if simply opting out of this plan and handling additional savings on my own is foolish, but the way that Northwestern Mutual is going about this process is really rubbing me the wrong way. I guess at this point, I’m wondering if it’s worth just swallowing that I’m supporting a basically predatory situation, and if I do contribute to this SIMPLE IRA + Annuity, if there’s any way that they can make it difficult for me to immediately transfer the funds to Vanguard, or if that is relatively automated? I’m still a bit unclear on how that process would work.

Thanks again to everyone for the advice and helping me work through this. I’d like to be able to just be asking Northwestern Mutual these questions, but they’ve made it clear to me they’re only interested in making things unclear and misrepresenting my options.

Spirit Rider
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Re: Annuity in SIMPLE IRA

Post by Spirit Rider » Tue Jan 23, 2018 11:54 am

c8n wrote:
Tue Jan 23, 2018 7:00 am
Quick update, I found out the plan actually is a 5304. However, NWM told our admin that “because of the way the plan is setup,” that the only option is to go through NWM.
NVM is lying.. That is only true if it were a 5305.

A 5304-SIMPLE IRA allows each employee to designate their own Financial Institution (FI). Neither NVM or your employer have any say in this matter. In fact, it has nothing to do with NVM, they are only the default FI. It is your employer who must set up a SIMPLE IRA plan at your specified FI and transfer your contributons/matches to your account. With a 5304 the employer has no choice and failure to follow an employee's request is a violation of IRS and DOL regulations.

There is simply no reason to use NVM unless you have exceeded the notice period.

A quick question. Since this is a new employer. What was your start date? The normal notice period would have been 11/02/17 - 12/31/17, However, if your start date was > 11/02/17 your notice period extends 60 days from then.
c8n wrote:
Tue Jan 23, 2018 7:00 am
Thanks again to everyone for the advice and helping me work through this. I’d like to be able to just be asking Northwestern Mutual these questions, but they’ve made it clear to me they’re only interested in making things unclear and misrepresenting my options.
This is clear from this last piece of information. I would like to think it is incompetence, but from many other posts over the years. There is a clear and convincing pattern of outright deception.

If this truly is a 5304-SIMPLE, there is not any reason at all to be talking to NVM. This is entirely between you and your employer.

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Mel Lindauer
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Re: Annuity in SIMPLE IRA

Post by Mel Lindauer » Tue Jan 23, 2018 4:32 pm

Here's a link to a Forbes column I did some time ago, listing reasons why variable annuities don't belong in retirement plans.

Perhaps you might print it out and show it to your boss.

https://www.forbes.com/2010/07/02/varia ... dbfeb3caaa
Best Regards - Mel | | Semper Fi

c8n
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Re: Annuity in SIMPLE IRA

Post by c8n » Wed Jan 24, 2018 11:48 am

Spirit Rider wrote:
Tue Jan 23, 2018 11:54 am
c8n wrote:
Tue Jan 23, 2018 7:00 am
Quick update, I found out the plan actually is a 5304. However, NWM told our admin that “because of the way the plan is setup,” that the only option is to go through NWM.
NVM is lying.. That is only true if it were a 5305.

A 5304-SIMPLE IRA allows each employee to designate their own Financial Institution (FI). Neither NVM or your employer have any say in this matter. In fact, it has nothing to do with NVM, they are only the default FI. It is your employer who must set up a SIMPLE IRA plan at your specified FI and transfer your contributons/matches to your account. With a 5304 the employer has no choice and failure to follow an employee's request is a violation of IRS and DOL regulations.

There is simply no reason to use NVM unless you have exceeded the notice period.

A quick question. Since this is a new employer. What was your start date? The normal notice period would have been 11/02/17 - 12/31/17, However, if your start date was > 11/02/17 your notice period extends 60 days from then.
c8n wrote:
Tue Jan 23, 2018 7:00 am
Thanks again to everyone for the advice and helping me work through this. I’d like to be able to just be asking Northwestern Mutual these questions, but they’ve made it clear to me they’re only interested in making things unclear and misrepresenting my options.
This is clear from this last piece of information. I would like to think it is incompetence, but from many other posts over the years. There is a clear and convincing pattern of outright deception.

If this truly is a 5304-SIMPLE, there is not any reason at all to be talking to NVM. This is entirely between you and your employer.
I haven’t exceeded the notice period, I started Jan. 1. I’m going to inquire about setting this up directly with Vanguard in this case, since NWM doesn’t seem to be acting very honestly here, and that’s the better choice anyway.

Thanks for all of the input everyone!

Spirit Rider
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Re: Annuity in SIMPLE IRA

Post by Spirit Rider » Wed Jan 24, 2018 12:25 pm

The way this will work.Your employer will adopt the SIMPLE IRA plan at Vanguard, set up the contribution mechanics and you will open your own SIMPLE IRA account.

If this is a smaller company. People have reported better success investigating the process, downloading loading the necessary documents and forms and shepharding the process themselves. You will have to calibrate this at the new company whether that will be appreciated or viewed as encroaching on HR/Benefits turf.

Just be aware that it may very well be that no one has done this before. NVM's incompetence/deception may have convinced HR/benefits that this is not possible. We have seen this before and people have encountered push back from the company. You may have to be in the 5304-SIMPLE IRA education business.

Also, it could very well be that the reason the company has such a poor SIMPLE IRA is that one or more members of senior management are clients of the NVM salesman. They may think the greatest things about them and NVM's products including the SIMPLE IRA.

So I suggest you tread lightly and do not frame the discussion around how bad the NVM product is, Rather just frame it as a positive that you want to go to Vanguard. If you have other Vanguard accounts raise that as a primary reason.

Good luck.

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