Author Topic: Surrender charges: Head vs. Gut  (Read 3039 times)

Stephaniekb

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Surrender charges: Head vs. Gut
« on: December 09, 2014, 11:43:15 AM »
I am trying to unwind from three stupid investments in variable rate annuities. The annuities ($55K and $30K in IRAs; $99K in taxable funds) have surrender charges that decrease over 8 years. I know in my head that the fees we're paying for these investments are quite high (nearly 3%, compared to the vanguard funds I plan to move them to) and we'd probably make back the surrender charges ($1500, $1200, and $2700) within a year, but I'm having a hard time pulling the plug from a gut perspective. My husband's two funds (the 30K and 99K) have a contract renewal in April, so I'm thinking of waiting to move those until April to reduce the loss by about $1,000.) We are 48 and 50, so have 9-11 years to make back the losses, since the taxable money is now characterized as a retirement account. Does anyone know whether those losses are at least a tax write-off -- that would help me justify taking the loss. 

I think I need a face punch on this one.

MDM

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Re: Surrender charges: Head vs. Gut
« Reply #1 on: December 09, 2014, 12:05:35 PM »
If I read the post correctly, you have surrender fees of 2.7%, 4%, and 2.7% respectively for the $55K, $30K, and $99K annuities.  Is that correct?

And, while variable annuities are (in your words...) stupid investments, your will get some return if the market rises.  Probably worth an hour or two to look at
  - how long until the surrender fee goes to 0%?
  - what market increase (including dividends) would be needed to overcome the surrender fee?  Need to know exactly how your annuity return is calculated to do this.

By the time you finish the above, your head and gut may become better aligned.

I don't think you will get a tax write-off.  Sorry - call it the price of experience....

If you put the annuities in the IRA yourself, then face punch deserved.  If you had a "financial advisor" who did this "for" you, that is even worse.

forestbound

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Re: Surrender charges: Head vs. Gut
« Reply #2 on: December 09, 2014, 12:45:21 PM »
No facepunches, I have annuities too. I am waiting one more year to reduce the penalty. Do your annuities allow you to lock in gains? I did that and will surrender them next year. I am assuming the market is high right now and I locked in gains. If the market goes down I will have made my penalties back that way. It's market timing which is bad, but that is what my gut told me to do.

No tax write off that I know of.

KevDolan

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Re: Surrender charges: Head vs. Gut
« Reply #3 on: December 09, 2014, 01:03:56 PM »
I rolled over two different investments from Ameriprise into Vanguard just recently, stephaniekb. I also took a hit for surrender charges. Before I did so, I figured out the difference between 3% and .05% per year. Let's walk through it. We will assume that the annuities and funds neither make nor loss money their first year. Obviously that is not a reasonable assumption, but this exercise is to isolate the the fee amounts.

Current Investment Company:
$184,000 x 3% = $5520 in fees per year

Vanguard
$184,000 - $5400 (surrender charge) = $178,600; 178,600 x .05 (VTSAX) = $89.40 in fees per year

So after one year your annuity will have $184000 - $5520 = $178,480
Investing in VTSAX with the money that you rolled over to Vanguard is $178,600 - $89.40 = 178,510.60

So, after one year you actually come out ahead, despite the surrender charges. VTSAX has a very low expense ratio. There are many funds that have higher ratios, but you get the idea.

I would double check the math. (Dammit Jim, I'm a musician not an accountant.)

This is obviously a complicated situation as forestbound and MDM point out, but I would make the change. As a matter of fact, I did make the change. My funds finished rolling over on December 1st.

Yes, it hurts to consider the amount that you have to fork over to that investment company.

Stephaniekb

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Re: Surrender charges: Head vs. Gut
« Reply #4 on: December 09, 2014, 10:32:32 PM »
Thank you for a) the facepunch b) the mathematical example and especially for c) the original start trek reference. I have definitely learned the lesson of "if you don't understand something, don't buy it" very well from this experience. Forestbound, when you asked about locking in the gains, can you explain more? When we purchased this, we were told that the gains are guaranteed to be 7% every year, but I'm now confused about whether that 7% is locked in each year or during the payout period.

There is an 8-year phase-out of the penalty, and we are half-way through it. In April the penalties on the funds with 99K and 21K will go down by approximately $1000, so I'm considering waiting until then to move that money.

One more variable I forgot to mention: These funds have a penalty-free withdrawal amount (for example, the $55K IRA allows me to withdraw $20K penalty-free.) I'm considering taking out just the penalty-free withdrawal amount now and rolling it into a regular IRA at Vanguard. I'm assuming I could do this with all 3 funds, to at least take out 60K and put it into a lower-fee investment.

It's my understanding that the IRAs annuities can be converted back into regular IRAs, but that the post-tax dollars now have to be kept in an annuity product until my husband is 59.5. I don't know whether they can be Roth pipelined earlier than 59.5 if we get into a lower tax bracket; do any of you know this?


MDM

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Re: Surrender charges: Head vs. Gut
« Reply #5 on: December 09, 2014, 11:50:12 PM »
Thank you for a) the facepunch b) the mathematical example and especially for c) the original start trek reference. I have definitely learned the lesson of "if you don't understand something, don't buy it" very well from this experience. Forestbound, when you asked about locking in the gains, can you explain more? When we purchased this, we were told that the gains are guaranteed to be 7% every year, but I'm now confused about whether that 7% is locked in each year or during the payout period.
One way (actually, the only way I know of that works for me) for you to determine if you understand the annuity contract is to replicate the calculations in a spreadsheet.  You can do this if and only if you work through the confusion - and these contracts are intentionally confusing.

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There is an 8-year phase-out of the penalty, and we are half-way through it. In April the penalties on the funds with 99K and 21K will go down by approximately $1000, so I'm considering waiting until then to move that money.
That's ~3%/yr on the $99K, so "iffy", but ~15%/yr on the $21K - definitely wait on that one.

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One more variable I forgot to mention: These funds have a penalty-free withdrawal amount (for example, the $55K IRA allows me to withdraw $20K penalty-free.) I'm considering taking out just the penalty-free withdrawal amount now and rolling it into a regular IRA at Vanguard. I'm assuming I could do this with all 3 funds, to at least take out 60K and put it into a lower-fee investment.
Yes, do it!  The only caveat is that you might want to wait until just after a contract anniversary date.  Often you lose any interest on any amount withdrawn during the contract year.

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It's my understanding that the IRAs annuities can be converted back into regular IRAs, but that the post-tax dollars now have to be kept in an annuity product until my husband is 59.5. I don't know whether they can be Roth pipelined earlier than 59.5 if we get into a lower tax bracket; do any of you know this?
Don't know.  Fortunately, the "annuities inside an IRA" was one mistake my mother's former agent didn't make.  But the reason I know about these awful products is that (at >90 years old), she still has 2 annuities with 15% surrender fees (6 years to go to 0%), and 1 with a 20% surrender fee (8 years to go to 0%).  We are now taking full advantage of every penalty-free withdrawal option available.....

forestbound

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Re: Surrender charges: Head vs. Gut
« Reply #6 on: December 10, 2014, 06:50:55 AM »
Thank you for a) the facepunch b) the mathematical example and especially for c) the original start trek reference. I have definitely learned the lesson of "if you don't understand something, don't buy it" very well from this experience. Forestbound, when you asked about locking in the gains, can you explain more? When we purchased this, we were told that the gains are guaranteed to be 7% every year, but I'm now confused about whether that 7% is locked in each year or during the payout period.

There is an 8-year phase-out of the penalty, and we are half-way through it. In April the penalties on the funds with 99K and 21K will go down by approximately $1000, so I'm considering waiting until then to move that money.

One more variable I forgot to mention: These funds have a penalty-free withdrawal amount (for example, the $55K IRA allows me to withdraw $20K penalty-free.) I'm considering taking out just the penalty-free withdrawal amount now and rolling it into a regular IRA at Vanguard. I'm assuming I could do this with all 3 funds, to at least take out 60K and put it into a lower-fee investment.

It's my understanding that the IRAs annuities can be converted back into regular IRAs, but that the post-tax dollars now have to be kept in an annuity product until my husband is 59.5. I don't know whether they can be Roth pipelined earlier than 59.5 if we get into a lower tax bracket; do any of you know this?

Every annuity is different and like MDM said, they keep these confusing on purpose. Call the holder of the annuity directly and ask your questions. That is what I did. My annuity had a "lock in gains" option on the anniversary date. I did that and will surrender next year when my penalties are less painful.

BlueDove

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Re: Surrender charges: Head vs. Gut
« Reply #7 on: November 23, 2017, 07:15:58 PM »