Annuity IRA rollover accounts are a great thing to have when you want to diversify a large, complex retirement plan – especially if you’re thinking ahead to the best way to provide for your future beneficiaries. However, there are some issues that you’ll need to be aware of, even when the terms of the annuity IRA are met. Moving money into a traditional IRA will create a very different situation that may fit better into your overall retirement savings plan.
With a traditional IRA rollover, you’re utilizing the basic tenets of IRAs to your advantage. These accounts will place your money in a tax deferred status, allowing you to defer the tax burden until sometime in the future – hopefully, when your financial status has changed, and your tax rate is lower than when you first invested the money. A traditional IRA rollover will move the money from one account to another and maintain the tax deferred status of the money, which is a very desirable thing.
Annuities – even those associated with an IRA – are a very different animal. Generally, they have attractive guarantees that many investors find advantageous. The best of these are the income assurances that are built right into the structure of the annuities, providing a specified payout, regardless of market performance.
Other investors like the fact that there are insurance products built right into these plans – more specifically, that most annuity IRA accounts offer a death benefit (a set amount of money that a beneficiary will be paid upon the death of the account holder). If your annuity IRA comes with a death benefit, the beneficiaries typically will receive either the fair market value of the fund or, if it’s greater, they’ll get the original principal that was paid into the account.
Of course, there are issues with this type of annuity structure – specifically, that the major benefit of the annuity occurs only after the account holder dies. In addition, you can’t ignore the fees. Annuity IRAs are typically associated with very large fees, much larger than other investment vehicles, such as a traditional IRA or especially a Simple IRA. This will undoubtedly reduce the return an account holder can expect to receive on the money invested, as every penny that goes to someone else is a penny that the account holder doesn’t receive.
The potentially high cost of the annuity IRA is the chief argument against them. You, as an investor, will have to balance that argument against the very real benefits, including the fact that an Annuity IRA is much easier to manage than other types of IRAs. Traditional IRAs, for example, may be subject to little or no fees. But realize, however, that these other types of IRAs have none of the income guarantees you’ll find with an annuity and that if you try to withdraw even part of an IRA before the magic age of 59 and a half, the penalties can be substantial.
In the end, it all comes down to balancing the immediate needs that you have against the long term needs of you and your family. Both tools can have a place in your retirement savings plans, but it’s up to you to decide just where that place is and how to best distribute your money between these accounts.