What to do with a variable rate annuity

[LouisPritchard]

I have a variable rate annuity that was purchased for me 21/22 years ago. The purchase price was 13K and is now worth 36K. My understanding is that if I cash this out I have to pay regular income taxes plus a 10% penalty for being younger than 59.5. Does anyone know if you can roll this into an IRA and do the 72t thing with it, or something similar? It's averaged 5.1% over the years so I'm alright with leaving it but I hate the idea of having to pay income tax on what should be capital gains tax as well as that 10% penalty should I decide to use it early.

Edit: used different ROI calulator using the exact dates and amounts and it's 5.1% over 20.34 years

[MDM]

See http://money.cnn.com/2007/02/20/pf/expert/expert.moneymag/ for more details (at least as of 2007) - but I think your understanding "pay regular income taxes plus a 10% penalty for being younger than 59.5" is correct.

Not that it matters now, but it has averaged only (36/13)^(1/21) - 1 = 5% over the years.  In 1993 (21 years ago) the S&P 500 index was ~450.  Today, in round numbers, it is ~1800, for an average return of (1800/450)^(1/21) - 1 = 6.8%.  And that 6.8% does not include dividends.  Add ~2% for those and you get 8.8% - which is why most folks here encourage others to invest in a low cost broad index fund and avoid annuities.

But it's a whole lot better than nothing, so enjoy it whenever you draw on it.

[skyrefuge]

And that 6.8% does not include dividends.  Add ~2% for those and you get 8.8% - which is why most folks here encourage others to invest in a low cost broad index fund and avoid annuities.

I like to use http://www.moneychimp.com/features/market_cagr.htm for S&P 500 total return numbers. It shows the total return (i.e., reinvested dividends included) at an even higher 9.26% per year.

Stated more plainly, if that $13k had been invested in (an expense- and tax-free) S&P index fund, it would be $83,590 now rather than $36,000. Oof. Oh well, bygones!

[Mighty-Dollar]

I have a variable rate annuity that was purchased for me 21/22 years ago. The purchase price was 13K and is now worth 36K. My understanding is that if I cash this out I have to pay regular income taxes plus a 10% penalty for being younger than 59.5. Does anyone know if you can roll this into an IRA and do the 72t thing with it, or something similar? It's averaged 5.1% over the years so I'm alright with leaving it but I hate the idea of having to pay income tax on what should be capital gains tax as well as that 10% penalty should I decide to use it early.

22 years ago? This was almost certainly a so-called retail annuity that has very high fees between 3 and 4%. Get out! Switching to a Vanguard variable annuity is one option. Go to this site to see how much you will save https://personal.vanguard.com/us/whatweoffer/annuities/costcalculator Keep in mind that this cost calculator doesn't even factor in turnover rate cost savings if you were to invest in index fund sub-accounts (as you should).