So I need a little guidance from the Money Board...

Here's my objective: Max out a Roth IRA account (i.e. $5k) for 2011.

Here's what I have: a Variable Annuity from Western Reserve Life. A friend got me to sign up for this right after college and I had been funding it up until about 2 years ago, and then I've kind of forgotten about it. So I was looking at it this morning, and quite frankly, I'm not sure I understand it.

Here is a document that essentially explains what it is and all the pieces to it:
LINK

Everything I've read about one of these talks about it being a tax deferred account. But mine is a Roth, so that cant be true for me. Reading that link above, I guess mine is considered a "qualified account".

Anywho, I know and understand what a Roth is, which is why I want one. What I dont know is what differentiates this Roth Annuity account that I already have vs a normal Roth account? The only thing I know about this account is that it has this "Guaranteed Income Rider", which if memory serves me correctly, basically guarantees a minimum rate of return of 6%, regardless of how the market does (which is discussed in Appendix C of the above link).

Should I just go back to funding this guy, or open a "normal" Roth account and see about rolling over this account into that?

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Posted by tirebiter

7K R&G chile land aka SF

Member since Oct 2006

10995 posts

Posted on 2/2/12 at 3:16 pm to Htown Tiger

I don't have time right now to read the entire document. Something that takes 56 pages to describe an investment or insurance product is typically something you want to avoid and pays high commissions to the agents selling them. It looks like a very expensive product, and income riders typically apply to income in retirement.

ANNUITY CONTRACT FEE TABLE WITH GUARANTEED MINIMUM INCOME BENEFIT RIDER

Periodic Charges other than Portfolio Expenses

Annual Contract Charge
$30 per Contract year
Separate Account Annual Expenses (as a % of average separate account value during the accumulation period)

Mortality and Expense Risk Charge(1)
1.25 %
Administrative Charge
None
Total Separate Account Annual Expenses
1.25 %
Annual Charges for Optional Riders:

Guaranteed Minimum Income Benefit Rider Charge during the accumulation period(2)
0.45 %
Guaranteed Minimum Income Benefit Rider Charge after Upgrade:
Current
0.45 %

Maximum Guaranteed
0.50 %
Additional Earnings Rider Charge (optional)
0.35 %

Here are two illustrations of how the product could turn out.
LINK

I'm not an expert on VA's, but the bulk of info I have read indicate they are a very expensive product. You would likely do better in a low cost Roth IRA, and if you need additional "guaranteed income" at retirement buy an immediate income annuity with or without inflation protection.

This could help you as well:
LINK

You MAY have much better "benefits" in this VA compared to what you would be able to buy for a similar VA today, but that still doesn't mean you necessarily should keep or add to it. You could always call the company and have them answer any questions. There are numerous people on the board at that second link who are experienced with insurance/annuity products, you could join and hit them up for guidance, it's free.

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Posted by Janky

Team Primo

Member since Jun 2011

35957 posts

Posted on 2/2/12 at 4:00 pm to tirebiter

Here is a quick crash course on variable annuities. They have many components and tirebiter is right, they are expensive. For a good annuity today with a living benefit rider you are looking at an annual cost of around 3%. They work like a regular account with the exception of being able to add a protected death benefit and have the ability to have a guaranteed growth rate on an income amount. This security net is what some find attractive. If you are younger than 50 years old, you have no business being in an annuity in my opinion. For those that accumulated most of their assets already and are about to retire itis a decent place to park some funds for disbursement purposes. Here is a quick example of how a modern VA works. You put in $100k on 1/1/12 you will get a guaranteed return of 5% or 6% depending on which company or the market return whichever is higher. So lets say the market returns you 8%, then you account value (walk away value) is $108k (minus any possible surrender charges) and you income value is $108k 1/1/2013. From here on out your income value will never go down, but your account value will fluctuate. So now lets say year 2 gets us a -5% return. On 1/1/2014 you income value is now $113,400 and you acount value is 102,600. This continues on until you are ready to begin taking income. The amount of income will depend on what rate the company allows (lets say 5%)and the income value. So lets say in year 20 you income value is $210,000 and you account value is $154,000, then 5% X $210,000 is $10,500 of lifetime annual income. This is a pretty simplistic example, but you get the point. I am not saying they are good or bad just trying to help you understand. Let me know if you have any other questions.

This post was edited on 2/2/12 at 4:02 pm

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Posted by Htown Tiger

Houston

Member since Sep 2005

2333 posts

Posted on 2/2/12 at 4:09 pm to Janky

quote:
tirebiter and janky

Thanks for some very informative and helpful respones. Tirebiter, I'll definitely take a look at those links, and Janky, thanks for putting some of that in layman's terms cause thats exactly what I needed.

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Posted by tirebiter

7K R&G chile land aka SF

Member since Oct 2006

10995 posts

Posted on 2/2/12 at 5:35 pm to Janky

quote:
you will get a guaranteed return of 5% or 6% depending on which company or the market return whichever is higher.

Aren't most of these equity indexed and the Ins Co only allows the contract holder say, 75%, of the upside on the index for the adjustment? If so, the holder is paying 3%, getting 3/4's of the upside, and if he is a decent investor should be able to do much better than that over the long haul. Can he do a 1035 exchange after the surrender period into a much lower cost annuity? And I have never heard of a Roth VA, do they exist?

I'm not beating them up, and for risk averse investors or bad investors the guarantees, although expensive and a drag on real returns, might be worth the cost. I don't find them attractive for my situation, nor would want to buy one in this rate environment.

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Posted by Janky

Team Primo

Member since Jun 2011

35957 posts

Posted on 2/2/12 at 6:10 pm to tirebiter

You are correct that, that is how indexed annuities work. However, indexed annuities usually don't cost 3%. The older jackson national indexed contracts had no charge. What I was describing is a variable annuity. They also have a guaranteed growth rate on the income value, in which you get the better of the guaranteed rate or actual market performance. Those annuities are about 3%.

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