Converting Roth IRA into an Annuity

(The following is a series of correspondences between Brent and myself. I hope the information can be helpful to a number of people.)

Converting Roth IRA into an Annuity

Hello, I am 52 and planning to retire at age 55 ( I am a federal employee under the older Civil Service Retirement System). My question concerns annuities. A salesman is recommending I convert my Roth IRA to an annuity so there is a guaranteed 5% return (compounded). I could make much more if the investments I choose for the annuity do well – there is a 1% reduction on those excess returns in the form of a company fee. Wouldn’t I incur a penalty by transferring the Roth IRA into the annuity? I’ve never heard of doing this and an internet search didn’t turn up much information. These are funds I don’t plan on spending until much later in life.

Thanks

Brent from Seattle, WA

Answer

Brent, It sounds like you already have a Roth IRA, but since you used the term "convert," I just want to make sure you do not currently have a Traditional IRA, and the salesman is recommending you convert the Traditional IRA to a Roth IRA and then purchase the annuity he is recommending. For purposes of this answer, I will "assume" the former is true and that your IRA is already a Roth IRA. Purchasing a variable annuity with a rider guaranteeing lifetime income is a very good option for someone wanting to guarantee he/she will have a specified amount of income for the rest of their life, especially if you can wait 5 to 10 years to begin the income stream. However, I would like to clarify the terminology you are using as presented to you by the person making the recommendation. These "living benefit" riders come in many forms, such as GMIB(Guaranteed Minimum Income Benefit), GMWB(Guaranteed Minimum Withdrawal Benefit, GMAB(Guaranteed Minimum Accumulation Benefit), and they do add to the expense of the annuity. It is important to understand which Rider your advisor is recommending and the additional cost of the Rider. These Riders are too complicated for me to explain in this response, however, you should ask your Advisor to explain it in detail to you.

In addition, ask your Advisor, to clarify his terminology of guaranteeing you a "5% return," because that can be very misleading, and it sounds like he is proposing a "Guaranteed Minimum Accumulation Benefit." If so, the "5% guaranteed return" would only allow you to elect a lifetime income after a certain number of years utilizing that guarantee, and yes if your investments perform well, you could realize more than the 5% guarantee. The additional cost of these guarantees will, of course, lower your overall return.

As mentioned, these Riders can be complicated and often difficult to understand, therefore I recommend you have the Advisor give you a detailed explanation.

With regard to your question about a penalty, if you currently have a Roth IRA, there would be no IRS penalty for you to put the funds into an annuity if you "roll over" the IRA directly into the annuity.

One last thing I would like to mention, I would hesitate purchasing an annuity from anyone I refer to as a "salesman." An annuity with these types of features should only be purchased through a true "Financial Advisor," who you feel is taking your entire financial situation into consideration, and not looking to merely "sell" you a product.

If any of the above assumptions are incorrect, please let me know and we will look at your situation again.

Best regards,

Jan Jaffin

Converting Roth IRA into an Annuity - reply

Jan,

Thanks for taking the time to answer my question about rolling over the Roth IRA (I have all Roth IRA savings having converted a traditional IRA balance some years ago). Your advice is spot-on, he did rush the decision, I need more information. It is a Xxxxxxx product but he also represents a couple other companies. No mention of a waiting period to lock in the guaranteed return was made. Having bought and cancelled whole life policies in my youth, I am hesitant to make any snap decisions. And I agree a financial advisor with my best interest in mind is the place to go for such a decision.

Brent

Answer

Brent,

I'm glad I could be a bit of help. I don't feel comfortable recommending specific companies or products through this venue, but annuities are my specialty, so feel free to ask any additional questions.

Good luck to you.

Jan Jaffin

Converting Roth IRA into an Annuity - follow up

Jan,

If you have any recommendations on how to find a fee-only financial advisor, I would be most appreciative to receive it. My father was extremely complimentary of your response and we decided this is the way to go for such an important decision and complicated set of products. He started a similar annuity a few years ago and was surprised at how taxes are applied to distributions and really didn’t need the insurance that comes with a VA. So, I think professional independent advice is the way to go.

Brent

Answer

Brent,

You are correct, you do need to seek professional unbiased advice. Trusting your retirement assetts to an individual to invest is an extremely important decision. There are many good Financial Advisors who will work with you to find the best way to invest your retirement funds, both fee-based and commissioned. My recommendation would be to contact some of the better known brokerage firms and banks in your area, and ask to meet with a Retirement Specialist. Then schedule an appointment and interview the Advisor to determine your comfort level with him/her. Ask them how they are compensated, and then make your decision. If they rush to make a recommendation and pressure you to make an immediate decision, that person may only be trying to "sell" you a product. This may take some time and effort on your part, however, it will be worth the effort if you find a person who will work to make sure you have the right retirement vehicle for your particular situation and a person in whom you have complete confidence.

As far as your father's annuity is concerned, it sounds like he has a non-qualified annuity. In a non-qualified annuity, the earnings come out first and of course are taxable at ordinary income tax rates. Your situation is different, if you do not take distributions from your Roth IRA until you have held it for 5 years and you are age 59 1/2, there will be no taxes due when you begin taking distributions. In addition, if you are only interested in income and not a death benefit, be sure to let the person you consult know that you only need a lifetime withdrawal benefit and not any additional death benefit. There are many options available with variable annuities, and your Advisor should only add the one(s) important to you, because each Rider will cost extra and take away from any potential earnings.

Best Regards,

Jan Jaffin

When to Retire

One of the most important decisions you will make in life is the one regarding when to retire. There are many considerations when you make this choice, among them:

*Your health and medical history
*The longevity of your family
*Your ability and/or desire to continue working

You may begin receiving benefits as early as age 62, however, if you begin your benefits early, you will have a permanent reduction in your benefit payments. In addition, to the reduction in benefits, another disadvantage of early retirement are deductions for exceeding the earnings limit. This earnings limitation, however, ends at full retirement age. The earnings limitation for 2010 is $14,160. Social Security uses a formula to determine the reduction in your benefits if you exceed that amount. If you were under full retirement age for the entire year, you would lose $1.00 in Social Security benefits for every $2.00 earned over $14,160. Earnings is considered any income from gross wages reported on your W-2 Form and net profit from Schedule SE. The following would not be considered earnings: Interest, Dividends, Capital Gains, Rental Income or any other Investment Income.

An example of the amount of the reduction if you retire early is:

If you were born between 1943 and 1954, your full retirement age will be age
66. If you retire at age 62, your reduction will be approximately 75%, at
age 63 your reduction will be 80%. If you retire at age 64, you will receive 87%
of your benefit, and at age 65, you will receive 93%. These are permanent
reductions in your benefits.

However, many people believe you should begin receiving benefits as soon as possible so that you can enjoy them longer. It will usually take at least 12 years of receiving a higher retirement benefit to make up for the Social Security checks you did not receive. In addition, the 12 year rule does not take into consideration the time value of money or the loss of enjoying your retirement years earlier. Receiving income early could allow you the freedom to do many of the things you have been delaying doing because of your work schedule, such as travel, hobbies, spending additional time with family and friends.

You can retire and begin receiving Social Security benefits as early as 62 or delay them until age 70. If you delay receiving benefits, you will receive a permanent increase in your payment amount depending on the number of months you do not receive benefits between full retirement age and age 70. Delaying retirement until after full retirement age will result in a permanent increase in your benefit amount. However, it takes approximately 12 ½ years of receiving the increased amount to make up for the checks that you could have received between ages 66 and 70, and, here again, the 12 ½ years does not include the time value of money. Delaying retirement past age 70 will not result in a higher monthly benefit.

As mentioned previously, there are many considerations when making this important decision. I recommend going to the Social Security web site to review all the calculations and requirements of early and delayed retirement as well as retiring at full retirement age,
www.socialsecurity.gov/.

Know the pros and cons of a reverse mortgage before going for one

By Marlon Powell, guest blogger

Reverse mortgages were initially launched in the year 1988. These loans are gaining more and more popularity, particularly among senior homeowners. As stated by a survey conducted by the AARP (American Association of Retired Persons), consumer consciousness is increasing and the average age for reverse mortgage borrowers has dropped from 76 to 73. Once the baby boomer generation attains 62 which is the age to qualify, the market for reverse mortgages is anticipated to grow significantly. In addition, the variety of products is also anticipated to increase to fulfill this demand.

According to the views of various finance professionals, a reverse mortgage loan mustn’t be the focus of a retirement plan. However, it is reasonable for some senior individuals. There are obviously pros and cons of reverse mortgages and it’s essential that you evaluate them watchfully before going for such a loan.

Whether you’re thinking about a reverse mortgage loan, giving suggestions to a family member or are keen to know more, the details given below can help you:

Pros of reverse mortgages

• The principal advantage of this kind of a loan is that you can take out a loan by utilizing the home equity and you don’t need to pay off the loan till the time you vacate your home. Rather than sending payments to a lender, you receive payments from a lender.
  
• If you have attained age 62, then you can qualify for a reverse mortgage. The amount you’re eligible to receive is dependent on your age, the amount of your home equity and obviously, the interest rate. The borrowing caps fixed by sellers and the location of your home are also important elements. If everything else remains the same, the higher your age when you obtain the loan, the higher will be the amount you can get.
  
• When you shift (whether you sell your home or retain it and lease it out) or if you expire, the loan has to be paid off. Nevertheless, the outstanding amount with interest wouldn’t surpass the value of your home. If any money remains when the value of your home grows quicker than the cost of the loan, you or your heirs can retain the difference.
  
• It is a flexible kind of a loan. You can receive the money as monthly payments, a one time payment, a line of credit or a blend of the three. Since the money you get is a loan and not income, it’s not taxable.
  
  Cons of reverse mortgages
  
• One of the most significant downsides of this loan is that it’s expensive. Origination fees and closing costs can amount to 8-10% of the loan limit. This is worth taking into consideration. It is equal to paying 8-10 points on a traditional mortgage. It’s so costly that it is only reasonable if you want to stay in your home for an extensive period.
  
• It is essential that you understand that in spite of the fact you don’t need to pay off the loan till the time you shift from your home, you’re still acquiring debt. If the value of your home grows adequately, (which happens on rare occasions) that growth can compensate a part or all of your loan costs. Regardless of how you take it, the debt along with interest is going up each month. In addition, you have the accountability of the recurring costs of insurance, upkeep and real estate taxes.
  
• One more probable disadvantage of this loan is family discord. If you have inheritors who hope to acquire the property, they might get disappointed to find that the lender possesses a considerable part or the entire home. You should make sure to discuss with your family members if you intend to obtain this loan. It is assumed that they would look for what is sensible for you in the end however it is always prudent to stay away from sudden unexpected events.
  
  When it is a sensible option
  
  A reverse mortgage can offer additional income for seniors with small amount of retirement savings who want to stay in their homes for a considerable period. It is also a feasible option for senior citizens who have very little cash and who might be compelled to quit their homes. A number of households have utilized these loans to offer home care for an aged parent.
  
  If the advantages of this loan surpass the disadvantages in specific circumstances, there are some loan options. The fees and loan limits differ from one lender to another and must be explored comprehensively. Options that should be taken into consideration are Fannie Mae Homekeeper Mortgage and Federally Insured Home Equity Conversion Mortgage or HECM.

Retirement on the Run

Note: This is the actual untouched question I received.

Dear sr

my friend have a criminal case pending in the USA ,he does not return to the US to face it , now he wants to receive his retirement money but we will like to know if it is true that he can not receive anything until he will return to the USA and face his legal situation .He is USA citizeen

Please answer me back ASAP

Yolanda from South America

Answer

Yolanda,

Although I am glad to give retirement advice, this is a situation that requires legal advice from a lawyer. I would also suggest that you check out the following web site: www.socialsecurity.gov/onlieservises/ Click on the "Do you Qualify for Benefits?" link, and I think you will find some valuable information.

Good luck to you, you are probably going to need it.

Jan Jaffin

Reply

Dear Mr. Jaffin

thanks for your advice on the social security matter. He is allready contacting an Attorney to clear up his legal situation.

You are doing a great job and I thank you one´s more time

Yolanda

IRA Contribution Limits

During 2009, I worked for 2 months for a company that offered a 401k. During that time, I contributed $1927. Then, I went to work for another company that does not offer a 401k. I am 54 years of age. How much can I contribute to my IRA? Also, my wife worked for a company that offered a 401k, again, for 2 months. She contributed $1267. She did not work for the rest of the year. She is 45 years of age. How much are we allowed to put into her IRA?

Thanks,

Lance from Kansas City, KS

Answer


The simple answer to your question is, you may both contribute to a Traditional IRA for 2009 (up to April 15, 2010). Taxpayers age 50 and over are allowed to contribute an additional $1,000 as a "catch-up" contribution. Therefore, since you are over age 50, you can contribute $6,000, and since your wife is under age 50, she can contribute $5,000.

The question is whether you can deduct the IRA contribution from your taxes. The answer to that depends on your modified adjusted gross income for 2009. I am assuming you are married, filing jointly. If so, since you both had a qualified retirement plan available to you during 2009, if your MAGI is $89,000 or less, you can have a full deduction. If your MAGI is more than $89,000, but less than $109,000, you can have a partial deduction If your MAGI is $109,000 or more, you may not deduct any of your contribution. If you are in the $89,000 to $109,000, there is a formula in IRS Publication 590, which will tell you how much you may deduct.

For a Roth IRA, generally you both may contribute to a Roth IRA as long as you had taxable compensation for 2009, and your modified adjusted gross income is $176,000(married filing jointly). The limits are the same as for a Traditional IRA, $5,000 each, plus an additional $1,000 for taxpayers age 50 and over. Please remember, you cannot contribute the maximum amount to a Traditional IRA and Roth IRA, you may only contribute a TOTAL of $5,000 each (plus the $1,000 catch-up for yourself).

The key here is that you are able to contribute to a Traditional IRA, regardless of your income or availability of a Qualified Retirement Plan.

Is a Roth Right for You?

Beginning in 2010, the Tax Increase Prevention and Reconciliation Act lifted the restrictions on who can have a Roth IRA by allowing anyone, regardless of their income or tax filing status to convert their Traditional IRA to a Roth. Some articles and advisers are saying everyone with a Traditional IRA should convert to a Roth. However, not everyone would benefit from a Roth Conversion. For instance, if you are near retirement age, and plan to use your Traditional IRA for income at retirement, you would not necessarily want to pay all the taxes due upfront. Just take your funds as you need them and pay the taxes in the year you withdraw the money from your Traditional IRA, especially if you will be in the same tax bracket when you take distributions. Wait as long as you can to pay the taxes, and pay them in small increments as you use your money.

To determine whether you could benefit from a conversion, consider these advantages of a Roth IRA over a Traditional IRA:

• No Required Minimum Distributions
  
• Tax-free income
  
• Ability to leave money tax-free to beneficiaries
  

Technically anyone is eligible for a Roth IRA beginning in 2010, however, you will benefit most if you fit into one of the following categories:

• You do not want or need to take money from your IRA, including RMDs, thereby allowing you to leave money tax-free to your heirs
  
• You have assets in another account to pay the taxes due upon conversion. If you have to pay the taxes due from your IRA, converting is not usually a good idea. Remember you can choose to pay all the taxes owed in one lump sum in 2010 or you can spread the taxes out over equal payments in 2011 and 2012.
  
• You are a high net worth person who was not eligible to convert previously

Just because something is new and everyone is talking about it, does not mean it is right for every individual. Consider all the pros and cons of conversion before you make your decision.

Age 61 1/2 and Laid Off

Jan,

I am 61 ½ years old and just received notice that I will be laid off on December 30, 2009. I believe that the Social Security Administration averages the last few years of your employment in order to determine your monthly benefit. For the past 3 years I have made about $77,000 and I am worried that if I find a new position it will not pay that much and if I wait until I am 66 ½ to retire my monthly benefit will be reduced substantially. Should I retire now while my income is high and work part time to supplement my income or take a lower paying job? I currently have roughly $220,000 in all of my retirement accounts. Thanks for your opinion.

Coy from Mineral Springs, NC


Coy: You are facing a difficult decision. According to the Social Security rules, your social security benefits are actually based on your lifetime earnings. Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most money. They then apply a formula to those earnings to arrive at your basic benefit, and that is the amount you would receive at full retirement age. There is a worksheet on line at www.socialsecurity.gov to help you determine your benefit amount. This means if you continue working past age 62, the additional earnings could actually increase your benefit.

I encourage you to talk with a financial advisor about your retirement accounts to determine how best to invest those funds for your retirement needs. There are some excellent variable annuities with lifetime income guarantees you can consider. If you don't currently have a financial advisor, I suggest contacting a local bank or brokerage firm and ask to speak with a retirement specialist. The financial advisor can assist you in determining whether you currently have sufficient funds to go ahead and retire or whether you may want to continue to work a few additional years so you will have the money to do what you desire in retirement.

Good Luck!