Referral to pros/cons website or article of taking retirement 401k dist. as IRA rollover and annuitizing

[Guest jusducki]

Participant would like to read an article or two or twenty (he's an engineer) on the concept of taking the entire distribution as an IRA rollover versus buying an annuity from an insurance company and immediately annuitizing it. Any ideas of an article or site that I could puruse to help him?? Thanks in advance.

[david rigby]

This website is a great starting point for articles, referrals, publications, etc. Click the logo in the upper left corner to search the entire website.

A simple approach is to get some quotes from reputable insurance companies, using the best estimate of the full account balance, expected date of "purchase" and expected date of annuity commencement. Then compare to withdrwals from IRA. See tables in this IRS publication: http://www.irs.gov/pub/irs-pdf/p590.pdf. (Call 1-800-tax-form to get a copy.)

[Guest duh]

How old is your engineer? If he is looking for the most flexibility, he can take the distribution as a rollover into an ira and possibly do a 72(t) annuitization. By doing this he would use the annuity tables and take out just the annual minimum for a period of five years or until he turns 59 1/2 whichever is longer. By doing this he has income and avoids being locked into an annuity with big premiums for the agent, surrender charges, expenses etc........ Once he has fulfilled the five/59 1/2 time obligation, he can withdraw whatever he wants without penalty, just ordinary income taxes. The ira custodian can help him with the annual minimum calculations.

[MGB]

Unfortunately, duh's response completely misses one very crutial issue: the risk of outliving your investments (although perhaps not an issue if you have lots of alternative resources). That should be the primary reason for purchasing an annuity.

Although I haven't tried it, the following gives (I think) probability distributions of outliving your money:

http://www.soa.org/ccm/content/areas-of-pr...lyzer-software/

Being an engineer, he ought to appreciate the significance of statistical distributions of his decisions.

[GBurns]

duh

Aside from the benefit of an annuity that MGB points out, I think there are other very issues.

1. If rolled over to an IRA, in what will the money be invested and at what rate of return? Will that rate of return be better than the rate of return from an annuity? Were you thinking that the IRA is an investment or earns much just by being an IRA?

2. What are the charges, fees and expenses for the IRA and for its investment? Do these charges total more or lees than the sales commission etc load of the annuity? How much is the sales commission? It could very well for an immediate annuity be less than 2%. Is that more than the charges for the IRA and its investment?

3. You stated that after "the five/59 1/2 time obligation, he can withdraw whatever he wants without penalty". Why is this any different from the 5 Year surrender charge of many annuities? Which penalty is less?

4. Taxes on accumulations or earnings. What is the tax liability of the IRA vs the annuity?

5. Taxes on premature withdrawals. Which has a higher tax liability?

6. Net gain. Which will leave the engineer with the most net money at any given time?

Having a blind bias prevents one from evaluating the facts and circumstances and leads one to make assumptions that might be very inaccurate. I personally try to gather all the facts, consider them, then give an opinion. The opinion might not be as good as those of others, but at least it was given with some thought of the facts.

[Guest duh]

GBurns

You raise some very legitimate points. I might suggest the engineer in question do a little reading and possibly visit a financial planner or broker who has a planner on staff. Outliving your assets is a concern for most people. A planner will look at the total financial picture not just the rollover in question. They can construct a portfolio that could include a mixture of insurance products, stocks, mutual funds, etc...... and work toward a rate of return to provide a target income.

When I worked at a wire house, we managed accounts from planners for individuals in this situation.

As for your reply -- OUCH!

[AndyH]

In defense of duh (solely because I like the name), he prefaces his comments as "if he is looking for the most flexibility". In that regard, I agree with his comments.

But the point about outliving his investments is of course valid and would be of interest to the engineer (they are the only participants who read SPDs). Some of the other ones are as well, although to a lesser degree in my admittedly annuity adverse opinion.

[jquazza]

Andy,

I am with you on the annuity adverse opinion, I guess I am slightly turned off by the 8 1/2% + commissions and high surrender charges, but again, I do not sale them. I guess they do bring a certain comfort level to folks who need guarantees and that has a price. The reverse side is fixed annuity payments may not keep up with inflation.

I am a little confused by GBurns' comment as far as the taxes are concerned

4. Taxes on accumulations or earnings. What is the tax liability of the IRA vs the annuity?

Wouldn't you pay taxes on whatever you take out anyway at your current rate in either case?

[GBurns]

Where have you seen 8 1/2% commission on an immediate annuity? Even if you saw 8 1/2%, why would you not feel free to choose 1 with 1%?

Re Item 4:

In any comparison or evaluation all aspects should be considered. So as long as there is a possibility of an item it should be included. Taxes included. Do you know if the rate of taxes will be the same for each item? How would we know that if we had excluded it from consideration?

[AndyH]

Mr. Burns, if you can point me to an immediate annuity with a top rated insurer with no surrender charges after 5 years and a 1% commission then I would be interested in looking at that. I would of course want to know (or determine) the implicit investment return assumption because that could very well hide a commission or profit.

[joel]

Remember, in return for a guaranteed lifetime income you are transferring the title to your money to the insurer. If one determines that lifetime annuitization is best for themselves and their families please use the no-load outfit known as TIAA-CREF.

[joel]

Jusducki:

Besides a lump-sum settlement option what other options does your Plan offer your engineer?

[AndyH]

joel, I take exception to your referral. I have first hand knowledge of a 72+ year old retired teacher who would have been charged a huge load to withdraw his money at age 72 or 73 in a lump sum form. He was a teacher for some 30+ years.

I saw the statement. My recollection (it was a few years ago) was that the charge would be 20% to 25%.

He didn't mind; he'd just be annuitized! I knew he was being ripped off.

[joel]

AndyH:

I do not understand your post. Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) is the pure no-load annuity and mutual funds company I recommend for someone who is desirous of an immediate payout annuity. What company did you think I was referring to?

Joel

[GBurns]

AndyH,

I do not recall any immediate annuity having a surrender charge.

Immediate annuities do not have to come from insurance companies so there is no reason to limit anyone to "a top rated insurer".

As for 1% commission:

Aside from Vanguard, T. Rowe Price, Fidelity which you might say are funds not insurers there are highly, if not highest) rated insurers such as TIAA-CREF, Prudential, ING, Berkshire Hathaway (http://www.biltd.com/products/SPIA.pdf), USAA, GE and you can find many others through www.annuitynet.com

The link below is to what one national insurance brokerage offers, however, these are among the higher commission products, which is why they are available through these insurance brokerage houses. That distribution channel needs high commissions in order to operate. The lower commissions are usually from the highest rated companies who do not participate in the large scale brokerage house distribution channel and are therefore not on this list:

http://www.biltd.com/products/SPIA.pdf

[AndyH]

Very interesting, thank you Mr. Burns.

And, joel, I checked out their prospectuses and they are consistent with your comments. The situation that I experienced may have related to an older or different type of contract, but there was a surrender charge of some 20% of the stated contract value for a lump sum withdrawal but no such charge for an annuity conversion. Perhaps things have changed.

[joel]

And, joel, I checked out their prospectuses and they are consistent with your comments. The situation that I experienced may have related to an older or different type of contract, but there was a surrender charge of some 20% of the stated contract value for a lump sum withdrawal but no such charge for an annuity conversion. Perhaps things have changed.

=====================================================

Re: Tiaa-Cref

Andy: In its 86 years of operation TIAA-CREF has always been a pure no-load company. You may want to check your files; in as much as the 20 percent surrender charge you refer to does not, I assure you, apply to TIAA-CREF. You are referring to another company.

Joel

[joel]

GBurns,

The reason why the giants of the industry pay less of a commission than the other less recognized companies is because they advertise in a big way. The claims paying ability of the insurer is the only thing that matters with immediate annuitization. Why pay any commission at all for immediate annuitization or for that matter a single premium deferred annuity? Go directly to the no-load annuity providers. You will find that the no-load providers are AAA.

Joel

[AndyH]

Joel, the situation I described was a teachers annuity and I do not think that I had the company wrong but I do not have the information to prove it so I will not push that any further. I have only my recollection.

Perhaps you can explain how these work. When a teacher participates over their career and wishes to retire, is a lump sum option typically allowed? Is there a difference between the "annuity value" and the "contract value" or the actual amount available to be withdrawn? My recollection is that withdrawal was possible over a series of years without penalty. And does it depend upon the number of years of participation?

How do the teachers annuities work with TIAA CREF at retirement age other than the option to convert to an immediate annuity?

[Guest Joel Lee]

Andy:

Most teachers have Defined Benefit pensions from their Public Employee Retirement Systems. I trust, therefore, you are referring to the voluntary salary reduction arrangements under section 403(b) of the Code. 403(b) permits investments in annuities or mutual funds. Most of these 403(b) investments are sold by commissioned sales people; thus, the participant is subject to Contingent Deferred Sales Charges. So if the account value at the time of "retirement" is rolled over to another investment alternative like no-load mutual funds the teacher will have to pay the sales charge if one is due.

THE WAY AROUND THIS IS TO MAKE SURE THE EMPLOYER OFFERS NO-LOAD FUNDS DURING THE ACCUMULATION PERIOD. BUT IN THE LONG HISTORY OF SECTION 403(b) THE VARIOUS LOCAL SCHOOL DISTRICTS THROUGHOUT THE COUNTRY JUST DON'T CARE AND ALLOW THESE SALESPEOPLE TO ENTER THE SCHOOLS AND SELL THESE COMMISSIONED BASED ANNUITIES OR MUTUAL FUNDS. In New York (outside of the city), for example, the ING conglomerate sells 403(b) variable annuities to teachers at a cost of 200-300 basis points and pays the teachers union more than one million dollars a year for its endorsement.

THE MAJOR EXCEPTION TO THE ABOVE IS ON THE HIGHER EDUCATION LEVEL WHERE TIAA-CREF SETS THE GOLD STANDARD.

TIAA-CREF also utilizes section 403(b) for the er's PRIMARY PLAN---the one which it helps fund. So based on the er's retirement plan there may be restrictions on settlement options. For example, the university may not allow for lump-sum settlements but mandates immediate annuitization with TIAA-CREF. If on the other hand the er's Plan allows for lump-sum settlements the ee is free to effectuate a rollover distribution to another qualified plan or simply take distributions based on life expectancy from TIAA-CREF.

TIAA-CREF accumulations in voluntary salary reduction annuities are never subject to compulsory immediate annuitization.

[AndyH]

Thanks for the information.

The situation I referenced was a high school teacher in Rhode Island who was at or near 70. My understanding is that it was a voluntary plan. I know it was not a DB plan. A lump sum was available-at 80% of the annuity value. Or it could paid out over x years and balance would earn 2%-one of those typical old annuity roll-out deals.

I recall that he for some reason had not been in that contract for that long, maybe 10 years or so, and I thought that was part of the problem.

Are you saying that it is not possible for this fact pattern to have been with TIAA-CREF or are you saying that it might have been depending upon the school system's contract and the particular sales person/sales agreement?

[joel]

Are you saying that it is not possible for this fact pattern to have been with TIAA-CREF or are you saying that it might have been depending upon the school system's contract and the particular sales person/sales agreement?

==================================================

TIAA-CREF is never a party to such a contract. Some of the most egregious practices in the distribution of financial products can be found in the 403(b) arena. It is a shame that the high level of due dilligence practiced by the higher education community is not mirrorred by the k-12 crowd. It is pathetic that a state teachers union endorses, for a fee, a commissioned based VA for its dues paying members.

[mbozek]

The only back end T/C charge is a 2.5% disintermediation fee for electing a lump sum from the fixed income (TIAA) annuity paid under the GRA contracts holding employer contributions. There is no charge for distributions from CREF or salary reduction 403(b) plans funded by TIAA.

[Guest Joel Lee]

One can get around paying this 2.5 percent fee by using a 10 year payout on the Tiaa annuity portion of a TIAA-CREF account. The participant is not forced to annuitize in order to be relieved of the fee.