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Annuities, tapping your retirement fund and other reader questions|
by Gene Walden
(From the Minneapolis Star Tribune)

If you have money to invest, there’s an annuity out there with your name on it—at least that’s the message some advisors give their clients. But you need to weigh the pros and cons before you sign the dotted line for any of these long-term investment contracts.

Here was a question on one reader’s mind: “I recently visited a financial advisor and he is recommending I move $92,000 of a stock invested IRA to an equity index annuity. That amounts to about 33 percent of my retirement portfolio. He also suggests that I move all of my mother’s $250,000 account from stocks into an annuity that guarantees at least 2.5 percent per year for the next 12 years. What do you think of that idea?”

I would be a little concerned about any financial advisor whose only recommendation is to buy annuities. From the advisor’s perspective, it’s an easy solution that would net him a hefty commission (usually in the range of 5 to 9 percent), but it’s not necessarily a good solution for you and your mother. Annuities are fine as part of a diversified portfolio, but you might be better served to find an advisor who can help you and your mother build a diversified portfolio that balances income and growth components.

“Annuities do have some value under the right circumstances, but they shouldn’t comprise more than about 10 to 20 percent of your portfolio,” says John Soukup, president of Bloomington-based Superior Wealth Management. “A good advisor should be able to suggest two or three approaches to your financial situation. If his only answer is to buy annuities, you should turn and run.”

I would also be a little skeptical of an annuity with a 2.5 percent annual guarantee. Why not put some of your mother’s money in a TIPS (Treasury Inflation Protected Security), which pays about a 4.5 percent return, is backed by the federal government and increases in value along with the rate of inflation?

For your own account, I think it would be reasonable to put 10 to 15 percent of your money into in an equity index annuity. Those annuities are loosely tied to the growth of the stock market, but offer protection against losses. If you do decide on an equity index annuity, try to find one that locks in gains each year so that when the market goes down, your annuity stays up. Also ask about caps. Most annuities put a cap on how much your account can move up in a good year—and that may vary from 5 to 12 percent (sometimes more). The higher the cap, the greater the potential for long-term returns.

You should also ask about penalties for early withdraw. Some annuities allow you to withdraw 10 percent or more for each year you hold the annuity. Others have high penalties for early withdraw.

And finally ask your advisor to show you two or three options from different annuity companies so you can make a valid comparison of potential returns and penalties. If the advisor can’t explain the options to your satisfaction, you should pass on the annuity.

Tapping into your retirement fund
Another reader asks:  “I’m several years from retirement, but I need to use some of my retirement fund money to cover my current expenses. What would be the best way for me to draw funds from my retirement account?”

By withdrawing money early from an IRA or 401k plan, you could face a 10 percent penalty, plus taxes. One creative solution would be to set up your own 401k plan, roll your retirement money from your other accounts into that plan, and loan money from that plan to yourself.

“That gives you the opportunity to borrow your own money and pay yourself back without penalties or taxes,” says Soukup.

“You can borrow up to 50 percent of your account, not to exceed $50,000, and pay yourself back with interest over the next five years. Setting up your own 401k is pretty simple and inexpensive, but you will probably need the help of your accountant or investment advisor.”

There are several other circumstances under which you can withdraw money from your IRA without paying the 10 percent penalty, including:

  • An unemployed individual may use IRA money to pay health insurance premiums.
  • You can pay for medical care to the extent generally allowable as a medical expense deduction.
  • You can use IRA money to cover some higher education expenses for yourself, your spouse, your children or your grandchildren.
  • You can begin withdrawing earlier than 59½ if you take periodic distributions of equal payments over your projected lifetime.

Where to sell your stocks?
Another reader asks: “My husband and I own stocks for which we hold the certificates. We do not buy or sell often. It seems like now all the brokers want all of the stocks in their hands and want to actively manage the stocks. They also want a fee based on the value of the stocks, which could amount to thousands of dollars each year for not doing very much. However, in our case, we just want a place to go to now and then to sell a stock or (rarely) buy one. Where can we go when we wish to do something with our portfolio?”

Most financial professionals would say it’s worth the management fee to keep your stocks in a managed account with a professional advisor. On the other hand, many do-it-yourself investors have done quite well investing on their own and it sounds like you’re comfortable handling your stocks on your own.

You might consider opening an account with a discount broker, such as TD Ameritrade, Fidelity, Charles Schwab, E-trade or Scott Trade. They charge only a few dollars per trade and there is no management fee for holding your stocks.



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