VA within an IRA

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Jul 6, 2006 10:54 pm

Personally, I think having a VA within an IRA is almost always a bad idea.


That being said, if I have a client who is in this position i'm assuming there are no penalties and tax implications  if I do a trustee to trustee transfer and change his VA to some mutual funds.  I will wait until it's out of surrender but I just wanted to confirm the penalties and taxes are moot in this case.


Thanks in advance.


scrim

Jul 6, 2006 11:00 pm

before we get into a long winded VA vs mutual funds debate:


yes, I know they would be losing that "awesome" death benefit and guarantees.


thanks in advance


scrim

Jul 6, 2006 11:18 pm
scrim67:

Personally, I think having a VA within an IRA is almost always a bad idea.

That being said, if I have a client who is in this position i'm assuming there are no penalties and tax implications  if I do a trustee to trustee transfer and change his VA to some mutual funds.  I will wait until it's out of surrender but I just wanted to confirm the penalties and taxes are moot in this case.


Thanks in advance.


scrim


There's a lot of hoopla about using a tax-deferred vehicle inside of a tax-deferred account, but I honestly feel like it is waaaaaaay overdone.  How many of your clients actually are attracted to VA's because of the tax deferral?!!!  I can honestly say that among folks I talk to, the tax deferral part isn't getting much attention from prospective purchasers...and I can't see any of the "cost" going toward "tax deferral".  In my world, people are solely focused on the guarantees...as in guarantee against loss of principal and a minimum guaranteed income for life.  They could not care less about "tax deferral" since it is at least partially a wash due to the unfavorable tax treatment when the funds actually do come out.  When people are not buying variable annuities for the tax deferral benefit, why is it such a big deal that it's an unnecessary benefit inside of an IRA?!!  If congress suddenly declared that the tax deferral benefit of annuities disappeared, do you think the price of annuities would suddenly drop?  I have my doubts, to be honest!


I will grant you that in a FIXED annuity, tax deferral is a more significant part of the selling benefits, since these often are used as CD substitutes, but honestly, I'm just not seeing anyone getting excited about tax deferral in a VA...it's the guarantees, baby!!!


OK...off the soapbox.  Yes, there's no tax liability for direct transfers from qualified annuities to a traditional IRA.


Now, I'd welcome a healthy debate about what is so doggoned bad about using a qualified VA for retirement funds when the client needs equity exposure/inflation protection, and cannot stomach risk of principal loss.

Jul 6, 2006 11:22 pm
scrim67:

before we get into a long winded VA vs mutual funds debate:


yes, I know they would be losing that "awesome" death benefit and guarantees.


thanks in advance


scrim


...and scrim, I'm not beating on you about the switch...I sincerely want to hear from someone about why qualified VAs are soooooo baaaaaad...I just don't see it.


...but just out of curiosity, what is the contract value vs. death benefit on the contract in question...and when does it expire?

Jul 6, 2006 11:31 pm

My opinion is that they are too expensive.


I was talking more in general terms.    I occasionally do see VA's within IRA's but thank goodness not too often.


scrim

Jul 6, 2006 11:39 pm
scrim67:

My opinion is that they are too expensive.

I was talking more in general terms.    I occasionally do see VA's within IRA's but thank goodness not too often.


scrim


As opposed to what? A mutual fund that the client is unwilling to accept?  A CD paying 5%?  I think you're focusing on the costs and ignoring the benefits.  I watched my clients' VAs return high singles to low double digits last year...with a guarantee against loss of principal...I'm struggling to see the downside here when a client can't hack the ups and downs of the market...

Jul 6, 2006 11:43 pm

I guess it's all relative.    I sometimes question wrapping up their IRA's with a 1% advisory charge making total expenses around 1.75% annually.


for my "nervous" customers I just simply lower the equity allocation.


we can debate this all night..they are no wrong answers.


scrim


Jul 6, 2006 11:54 pm

Agreed.  Again, this sin't really aimed at you, but I keep hearing about how regulators, etc. are really looking hard at qualified VAs, and I'm starting to wonder if they even understand why people buy them...anyone?!!


...and again, I don't do alot of annuities (I'm close to half in fee-based), but I've certainly found use for them among some in my client base.

Jul 7, 2006 12:00 am

yes, and one of my goals is to keep regulators off my back.


but, there will be a day when mutual fund wrap accounts are on the radar and I will have to defend my use of them.


scrim

Jul 7, 2006 12:20 am

Lowering equity allocation (example--below 100%) lowers expected returns.


So does keeping an (example) 100% equity allocation and incurring higher fees to get a guaranteed (insert favorite VA bell or whistle here).  People with insurance can take more risk--think how many mortgage loans would be made if there were no PMI...not as many, that's for sure.


If you can earn a 2% more return from the higher equity allocation over the long run, you can just about make up the cost difference, AND you can guarantee something.


But Scrim, didn't you beat this very topic into the ground with everyone just a few months ago....?!

Jul 7, 2006 12:25 am
Indyone:

Now, I'd welcome a healthy debate about what is so doggoned bad about using a qualified VA for retirement funds when the client needs equity exposure/inflation protection, and cannot stomach risk of principal loss.


I agree with everything you've stated in your posts.


That said, the answer to your question is:


Because the NASD says so.


And apparently because the NASD says that annuities inside of IRA's are now a no-no, or at least something to avoid, our compliance departments are now hyper-sensitive about this sort of thing. 


Bottom line, whenever selling a qualified annuity, I make sure that I put all over the suitability/transfer/replacement forms that tax deferral is NOT a feature that the client is looking for and I make sure that I also have in writing that the reason(s) for their purchase are the upside potential of the VA's subaccounts, the principle protection guarantee, and the guaranteed income rider benefits.  I figure all of that is plenty to cover my butt as well as my BD.

Jul 7, 2006 12:33 am

...and thus the regulators again keep us from doing what's best for our clients...how retarded is that?!!!

Jul 7, 2006 12:40 am

[quote=scrim67]

I guess it's all relative.    I sometimes question wrapping up their IRA's with a 1% advisory charge making total expenses around 1.75% annually.

Depending upon whose VA you use, there sometimes is not much cost difference between a fee-based mutual fund account and an annuity. 
Jul 7, 2006 12:52 am

the VA's my firm allows us to use when you factor in M&E, Fund expenses, guarantees of principal are all atleast 50% higher in costs compared to our MF wrap program.


scrim

Jul 7, 2006 12:53 am
Cowboy93:

But Scrim, didn't you beat this very topic into the ground with everyone just a few months ago....?!




Yes, that is why I prefaced my initial post the way I did.


scrim

Jul 7, 2006 1:05 am
scrim67:

the VA's my firm allows us to use when you factor in M&E, Fund expenses, guarantees of principal are all atleast 50% higher in costs compared to our MF wrap program.


scrim



Interesting... This isn't my experience.  We use VA's with M&E's between .75 and .95... add in a few miscellaneous costs and you are about equal with a MF wrap program

Jul 7, 2006 1:08 am

what about the fund fees?


those are usually atleast 1% in addition to the M&E

Jul 7, 2006 7:03 am

Bottom line about annuities/advisors: if annuities paid a broker a 1% commission (instead of 4-6%) they wouldn't be used nearly as often.


Simple enough.

Jul 7, 2006 7:38 am
The Judge:

Bottom line about annuities/advisors: if annuities paid a broker a 1% commission (instead of 4-6%) they wouldn't be used nearly as often.


Simple enough.



An annuity is a product that is sold to investors, not bought by investors.


They are rarely, if ever, the most appropriate choice.

Jul 7, 2006 8:33 am