I have a prospect who's IRA assets were put into Prudential annuities. The accounts have performed poorly for 10 years and this investor wants the accts out of Prudential.
From what I understand, IRA money shouldn't have been put into annuity in the first place, right?
My question is this: If I move the money to, say a Fidelity IRA acct, even if I don't put the money into annuity, instead just invest in Vanguard SP500 fund, there is no tax consequence, is that correct??
It is a transfer. The liquidation paperwork from Pru should give you the option of having the assets transferred to another IRA. Just like doing a 401K rollover.Annuity assets in an IRA are a complex subject. Perhaps the client was concerned about the market going down and wanted the death benefit. These days a lot of annuities are going into IRAs for the income riders. Some annuities were missold. Some were not. Talk with your client to see ask why they invested in the annuity to begin with. Maybe he doesn't need death benefit, income guarantees, etc. In that case other investments would be more appropriate and certainly less expensive.
First and foremost, ignore that adage that says annuities should never be bought in an IRA. That may have had some validity years ago when the main reason people bought annuities was for the tax deferral. Annuities sold today are predominantly sold for the living benefits (which didn’t exist 10 years ago) - in short, various guarantees that they can’t lose their money even if the ‘market’ goes to hell.
To the extent that is what this client WANTS, and they clearly understand the associated costs, new surrender periods and no additional tax deferral benefit exists, it’s no problem to buy it in an IRA. In fact, the vast majority of new VA sales now are in qualified accounts.
There is no tax event coming out of the annuity if the proceeds remain inside the IRA. Only when the funds are withdrawn from the IRA is there a taxable event.
The bigger issues to consider are things that have nothing to do with IRA vs. taxable, such as the new surrender period and whether or not they would give up enhanced death benefits. This can be a key. If, for example, the guaranteed death benefit is (say) $20,000 greater than the value of the account, you can effectively maintain that benefit while still getting out of the VA by doing a partial liquidation & surrender. Just keep the minimum required by the insurance carrier to maintain the contract and the DB, transfer or withdraw the remainder. Use the new money as you deem prudent, and they still own the annuity and the DB spread, but have minimal capital tied up there.
Forget the annuity within an IRA canard, and keep your eyes on the other important issues. Good luck.
As an aside to the annuity question -
I wonder if you want to buy an index fund given the times we’re currently in. Market weighted index funds underweight securities when they are mispriced to the downside & overweight securities when they’re mispriced to the upside. This market is acting in a very strange way right now. I wonder if he(and you) may benefit from active management these next few years.
Market-weighted funds information if you’re a committed indexer: