Trying to extricate myself from a Metlife Variable Annuity

[Futtee]

Hello MMMers,

I have a non qualified IRA in a Metlife Variable Annuity. I have just discovered that I'm paying well over 4% annually between fees, GMIB rider, and funds (70% Metlife Asset Allocation 40 Portfolio, 30% Pimco Total Return). There are steep surrender charges. 5% this year, 4% next year, 3% the following, etc. and I cannot surrender without charges until September of 2018 (I think).

Balance is around $93K.

I can't receive distributions for another 16 years, as I'm only 43.

The way I see it, paying 5% to completely surrender this year seems a bit foolish. Almost as foolish as buying the annuity in the first place, lol. I think my best option is to take out the free withdrawl amount, which is approx. $8,200, and use it to open an IRA at Vanguard, and then next year when surrender charges are 4%, I should withdraw and consider it a wash since I would be paying 4% in fees anyway.

Any thoughts on this strategy from the experts out there? Any other solutions I should be considering?  Thanks for your help and support.

[Gone Fishing]

By waiting until next year, you will be paying 4% to save 1%.  I say go ahead and bite the bullet.  Be sure to check the agreement carefully and see if there are any outs that you may be able take advantage of.

[Futtee]

So Close, thanks for that.  Duh.   I will read the contract and see if I can find a way out. 

[Gone Fishing]

Might want to consider tax implications, too.  If you are near the top of your bracket a taxable distribution could throw you over.  If that is the case, it may be worth it to see if you can "phase" out of the annuity over a few years to smooth your income or ramp up other deductable IRAs or 401(k) to offset.  I'm not an annuity/tax expert and may be barking up the wrong tree, but just something else to confirm before you pull the trigger. 

[Rob Costello]

If an annuity is an IRA, it is considered qualified. Please clarify.

Things you may want to review and consider:

1. Why did you buy the annuity in the first place? Guarantees? Tax Deferral?
2. Clearly you are not happy with the fees. If it is non qualified (not an IRA) look into a 1035 exchange to put in a different type of annuity with less expenses and riders.

If it is an IRA, you would want to roll it over into an IRA without an annuity. You still may incur surrender charges.

3. Annuities are very complex and there are a lot of nuances. Work with a professional who is a fiduciary not a salesman.

I hope this helps you make a smart decision. 

[Futtee]

Thanks for your thoughtful response, Rob.  We bought the annuity with inherited money.  At the time, we knew very little about investing and our broker suggested it and we thought it sounded like a good idea.  We liked the idea of guaranteed income for life. 

Fast forward to today, I am a stay-at-home-mother and my husband has his own small business, and we are far from maxing out 401Ks and IRAs.  And I am slightly more knowledgable about investing, and less conservative in my approach.  The high fees make my stomach churn, and I think our money could do better elsewhere.

Since it is an IRA, I am hoping to transfer it to an IRA without an annuity.  I am unclear as to whether or not I will pay taxes on the gains if I do this…I will still incur 5% surrender charges, but hopefully will make that up in a couple years. 

[Futtee]

I did some more research today.  Determined that total fees are 3.91% and surrender charges are just under 4%.  So in  my mind it makes sense to bit the bullet and roll this sucker into a Vanguard IRA. 

[DrF]

We are mid October, so if you held onto this thing for ~2 months, until January, does that reduce the early withdrawal fee? If so, then I say hold onto it for another few months, it would be like getting a guaranteed X.XX% return on your investment.

[Rob Costello]

Good point DrFunk. Sometimes it is the calendar year other times it is contract date (the day you bought it) that determines how long you have had the annuity.

In my opinion, it is almost criminal to advise someone put an IRA in an annuity unless you need that guarantee, which comes at a cost. Most brokers push this first because they get the biggest commission or they are drinking the Kool-Aid and don't know better.

Futtee, you mentioned this was an inherited IRA and that you are relatively new about investing and planning. You are probably already doing this, but make sure you are withdrawing your required minimum distribution each year. A required minimum distribution is a minimum withdrawal amount that is calculated based on the owner age and the 12/31 Inherited IRA asset value. If you do not, you may incur a 50% tax penalty on the amount that was supposed to be taken out.

I wish you the best of success.

[Futtee]

Thanks for your input Dr. Funk and Rob C.  I called MetLife and they confirmed that surrender charges are based on contract anniversary date, and since mine just passed in September, I think I will go ahead and get this thing rolled over to a Vanguard IRA.  I have spent hours doing more research and keep ending up at the same place - this instrument just makes zero sense for me to own.  I am paying almost 1% alone for a GMIB 10 year rider and cannot even touch the money without penalty for another 16 years.

Rob, thanks for your input on the almost-criminality of selling a VA with a GMIB to a very health 39 year old who is years away from retirement.  I am getting ready to take control back from my FP and move all of my accounts to Vanguard.  Recommendations that can barely be deemed 'suitable' has resulted in zero trust...I'm done.

[Rob Costello]

Hi Futtee,

Thank you for the kind words. I think you have made a wise decision and seem to be headed in the right direction. I think there are many teachable moments for the forum. When working with a "financial advisor" it is hard to tell the difference between who is looking out for your best interests and who is selling you something to line their pockets.

1. Brokers do not have a fiduciary responsibility to you. They sell products.
2. If you do not understand a financial product, do not get into it.
3. When working with a financial advisor, ask if they are a fiduciary and make sure you get it in writing.
4. Nothing is free. There are always fees or commissions. If they tell you otherwise, run away.

Thanks again for sharing and I wish you the best of success! 

[Futtee]

Thanks Rob, these are great points to remember.  Wish I had done my research a long time ago !!!  :(

[Mighty-Dollar]

At the time, we knew very little about investing and our broker suggested it and we thought it sounded like a good idea.  We liked the idea of guaranteed income for life. 

This is why commission-based advisers need to be avoided like the plague!  I made the same mistake as you when I was young and stupid and got taken advantage of by a piece of crap "adviser". I recently made the switch to Vanguard's Variable annuity through what is known as a tax-free 1035 exchange.  I am now literally saving about 2.5% per year! Only paying like 0.71% per year in fees. Not as good as being in index funds like VOO paying 0.05% but it's making the best of a bad situation.
https://personal.vanguard.com/us/whatweoffer/annuities/costcalculator
I also started a SEPP withdrawal program because I want a head start on getting money OUT of this damn annuity. It allows you to take out about 6% per year without paying the 10% pre-59 1/2 Federal penalty. That payment amount stays the same however.

[Stephaniekb]

I am in a very similar situation with some variable annuities sold to us by a financial "advisor" who profited very handsomely from the transaction. I spent a long time yesterday discussing this with a Vanguard annuity specialist. My husband and I each have IRAs that she invested in the annuities; according to Vanguard these can be converted into Vanguard IRAs (we will pay the surrender charges, which amount to about $4,000 total. I'm trying to figure out if there's any tax benefit to spreading the surrender charges out over tax years.) For the larger pool of money that is in the variable annuity, I'm going to do a 1035 transfer to Vanguard's annuity. Then once we hit 59 1/2 we can begin converting it to income or roths.

I definitely violated the rules of good investment advice (don't buy something you don't understand) when I made this; it sounded good because there were vague promises of "guaranteed 7% growth" and we made the investment just after the stock market crash in 2009.
Lesson learned, expensively.

[Mighty-Dollar]

Stephaniekb you can start a SEPP withdrawl from a variable annuity. You must continue it for at least 5 years and until you turn age 59 1/2. A SEPP is a great way to get a head start on getting money OUT of that expensive annuity. Even Vanguard (which is the cheapest) is gonna cost you about an extra 0.6% per year more than if you were just invested in index funds on your own.
That "financial adviser" that you dealt with was a non-fiduciary. Never go to a non-fiduciary for money advice.