Ask yourself why you bought it before canceling it


Q: I have a variable annuity that I purchased 10 years ago. My accountant wants me to cancel it, but my broker suggested I exchange it for another variable annuity. What should I do?

A: Ask yourself why you originally purchased the annuity.

Would you like a guaranteed death benefit for your beneficiary? With this investment, your beneficiaries will receive the promised amount if you transmit before the disbursement. Payment for you is only guaranteed if the policy has the income rider, which is usually quite expensive. If death benefit protection is an important consideration, consider the rider carefully before exchanging the annuity. There are age-based restrictions for death benefit riders.

Financial planner Mary Baldwin:

Were you trying to increase tax-deferred savings? Tax deferral is almost always best achieved with IRA and 401K accounts. Employees defer ordinary income from paychecks and usually receive the employer’s matching funds, i.e. free money. Max company retirement accounts first.

Are you interested in guaranteed payments for life offered by an insurance company for retirement income? If so, consider the lack of flexibility of this commitment. Most of us spend more when we are young and enjoy traveling and using new vehicles.

The lump sum that was invested in the annuity ten years ago was likely invested and generated a gain. When variable annuities are cashed in, the growth is withdrawn first and taxed as ordinary income. Only after the growth has been taxed at your highest marginal rate in that tax year, can the initial investment be accessed tax-free.

There are many factors to consider when deciding whether to redeem, cash out or keep an annuity. The tax consequences and annuity expenditures are significant. Stock markets return what they return minus expenses and taxes; you keep the rest.

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Review the original annuity contract, amendments, and prospectus and understand the terms, benefits, riders, options, and riders. It is important to know about mortality and expense risk charges, administration fees, underlying mutual fund options and expenses. Compare these fees with inexpensive no-load funds that are liquid.

Double-check the cost basis and redemption period. Investigate the financial strength and rating of the insurance company to ensure that it will be sound and able to fund retirement obligations.

Compare the death benefit to the current market value – income from annuities is taxed as ordinary income for the owner and beneficiaries. Talk to your tax professional about increasing the fund base and annuity taxes.

Mary Baldwin

If you are interested in lifetime guaranteed payouts, review the annuity terms of the contract. This is an irrevocable decision; once a contract pays off, it’s game over. It is a contract that will make payments, usually for life. Living longer than your projected life expectancy is the only way to win.

Analyze annuity swaps. If you are no longer in a redemption period, an exchange may restart the countdown to another redemption period.

Your goals determine whether you keep an annuity, redeem it, or cash it out. Review the expenses, find out how the contract fits into your financial plan, estimate the tax consequences and talk to your advisors. This is a binding contract with an insurance company, so read the fine print and understand before committing!

Mary Baldwin, CFP®, is a paid financial planner at Buckingham Strategic Wealth in Indian Harbor Beach. Contact her at 321-428-4555 or [email protected]

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Individuals should contact a qualified financial professional who can provide specific annuity advice to determine if the above information is applicable. The views expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®.


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