A common question we hear is "Should I purchase variable annuities with money inside my IRA?" We want to caution investors against variable annuities.
This type of investment is a contract with an insurance company for a specific period of time. When you deposit money into a variable annuity the money is used, most often, to purchase different mutual funds within the insurance contract.
There are several reasons we tend to caution investors against variable annuities:
- They are expensive, with huge internal costs with many layers of fees
- They can pay the broker's commissions as high as 10%
- They are very complex and difficult to understand, even by brokers
- They are difficult and costly to get out of (ex. surrender charges)
- Often sold to clients as a "tax deferred investment" but other investment vehicles like IRAs already offer tax deferred growth
You simply don't need the tax deferred benefit of a variable annuity if your money is already in a tax deferred account like an IRA or 401k. For retirees who are considering investing in variable annuities with the money that is in their IRA, it is unlikely that the variable annuity will provide any additional tax benefits. For these investors, a variable annuity only makes sense if the annuity offers other benefits such as a lifetime income payment. For most investors, the costs usually far outweigh the benefits.