annuity advice

[sandiahiker]

I need some advice about a couple variable annuities that my wife and I are kind of stuck with.

Metlife, series L $38000, $8300 growth
Pacific life, pacific value $28300, $4200 growth

Both of these have been sitting long enough without any additional funds added, so there are no surrender fees.

We are both in our late 30s and don't feel the need to have annuities, with their high fees and such, and we'd like to just be investing our after-tax money in regular mutual (index) funds.

The rest of our holdings are:
$46k Roth
$100k cash (we are in the process of moving this around, and also maxing out a 403b for 2013 that only became available recently.

$46k student loan, fixed at 2.75%, $315/month payments.

No mortgage (renting)

I want to move our annuities to vanguard, and the main question is should we bite the bullet and take the hit in taxes (ordinary income tax plus 10% penalty for pre-59.5 withdrawal). We are on the cusp of the 15-25% bracket.

Or, should we do a 1035 exchange to a vandguard annuity (VVA), which has fees in the area of 0.48%. The current fees are in the 2.5% realm.

Thanks for the help!

Mark

[footenote]

Be sure to read your existing annuity contract(s) down to the fine print: many have onerous "surrender" fees. If so, a 1035 may be your most economical "out."

[sandiahiker]

Be sure to read your existing annuity contract(s) down to the fine print: many have onerous "surrender" fees. If so, a 1035 may be your most economical "out."

Thanks for mentioning the surrender fees. I updated the original post with that info: no surrender fees.

[Petunia 100]

I want to move our annuities to vanguard, and the main question is should we bite the bullet and take the hit in taxes (ordinary income tax plus 10% penalty for pre-59.5 withdrawal). We are on the cusp of the 15-25% bracket.

I take it you bought these inside of a traditional IRA?   There is no need to pay the taxes and penalties.  Sell the annuities and leave the proceeds inside the IRA.  Transfer the account to the custodian of your choice and buy your index funds.   No tax, no penalty, just whatever fees the present custodian will charge you.

[sandiahiker]

I take it you bought these inside of a traditional IRA?   There is no need to pay the taxes and penalties.  Sell the annuities and leave the proceeds inside the IRA.  Transfer the account to the custodian of your choice and buy your index funds.   No tax, no penalty, just whatever fees the present custodian will charge you.

Sorry, I forgot to mention that too. These are non-qualified annuities, so there is no retirement account wrapper, unfortunately. Pretty sure that all the taxes and IRS penalties would apply. 

Mark

[Mighty-Dollar]

We are both in our late 30s

So you were sold annuities in your 20's or early 30's! Just unbelievably horrific "investment advice" that you got from some commission hungry salesman! 

At the very least I would do a tax free 1035 exchange to Vanguard. Their fees are WAY lower than the high-commission products that you all were sold. Perhaps about 0.7 percent fer year. Go to Vanguard's cost comparison calculator to see how much you will be saving https://personal.vanguard.com/us/whatweoffer/annuities/costcalculator

Keep in mind that with ETF's like VOO and AGG you'd be saving about 0.6% per year. Multiply that times 30 years and you might consider just paying the Federal tax penalty to get out.  You will also save on taxes. Capital gains taxes (ETF's) are much lower than ordinary income taxes (annuities).