If you have a high-fee, tax-deferred annuity you can make a 1035 exchange to get out of it
Most tax-deferred annuities have gotten a bad reputation, perhaps deservedly so.
They carry high fees and sales charges; once you're in one it's expensive to get out, and the tax deferral they deliver may not be so great at a time when capital gains rates are low and there's a strong possibility income tax rates will be higher in the future, when it is time to take money out of that account.
But tax deferral is still worth something. If you can pile up cash for years without carving out some for Uncle Sam, you'll have more cash to spend in retirement if - and it's a big if - you're not paying too much for the annuity in the first place. And if you fill it with the right investments.
The good news is that there are now more low-cost annuities on the market that fit those requirements. You still have to use them right. Here are some tips.
1. A mortality and expense risk charge - the piece that makes it an insurance policy - that is, on average, 1.35 percent of the amount of money in the annuity.
2. Administrative fees that can run another $20 or $25 per year.
3. Underlying fund expenses - the money that the mutual funds within the annuity charge for managing your money.
4. Surrender charges - penalties as high as 7 percent for selling your annuity too quickly.
5. Sales charges - the commission you pay if you're buying an annuity from a broker. There might also be added charges if you buy an annuity that has extra riders, like a long-term care insurance policy.
Yikes! It would take an awful lot of tax deferral to overcome all of that. Consider this example, from Jefferson National, a company that markets a low-cost annuity: Invest $100,000 in an inexpensive annuity with a 0.24 percent mortality charge, earning 6 percent a year, and you would have $311,885 after 20 years. If you used the same money to purchase an annuity with a 1.45 percent mortality and expense charge, you'd have $240,968 at the end of that time. That's more than $70,000 that you're leaving on the table, and that doesn't even count other investment or sales charges.
So . . . don't overspend for the tax deferral. Check out the Jefferson National Annuity (jeffnat.com), which charges a flat fee of $240 a year for its annuity, and those offered by Charles Schwab (schwab.com) and Vanguard Investments (vanguard.com), which charge 0.2 percent in mortality fees.
