Don't Wear Your Raincoat in the Shower

Does it make sense to investyour IRA through an annuity?In the wake of the recentbear market, there has beena resurgence of annuity sales. Investorswho took substantial losses in therecent market debacle and those whosaw others lose great amounts areunderstandably worried about securingtheir investments.

Because of their guaranteed benefits,annuities are becoming popular investmentvehicles for many shaken investors.While annuities offer some advantages,including an annuity in your IRA is a bitlike taking a shower while wearing a raincoat.The raincoat is simply in the way.

The primary advantage of an annuityis income tax deferral on all dividends,interest, and capital appreciation.Since an IRA already has these features,buying an annuity rarely makessense for IRA or other retirement planowners. One feature that is attractive tomany buyers is annuities' guaranteethat your death benefit prior to annuitizationwill never be less than what youoriginally invested in the contract. Ofcourse, you're paying for this benefitthrough the annual expense charges. Beaware of the disadvantages that annuitiespresent, including the following.

High Expenses

The upfront and ongoing expensesof an annuity can be relatively high. It isestimated that the average annualexpense for an annuity equals 2.1%.Some companies offer annuities withmuch lower expenses (eg, Vanguardand Charles Schwab), but you will alsofind companies that have much higherexpenses. Higher expenses reduce thegrowth potential of your investments.

Limited Investment Choices

When you're buying an annuity, youselect either fixed or variable. With afixed annuity, the insurance companypays you a fixed rate of interest that willchange every year or every few years.It's similar to buying a CD from a bank,except that once you have purchased theannuity, you are no longer free to shopfor the best rate until your surrendercharge has expired. You also don't receiveFederal Deposit Insurance Corporationinsurance. With a variable annuity,you can choose among a dozen orso mutual funds. By rolling your IRAto a discount broker such as CharlesSchwab or TD Waterhouse, you havealmost unlimited investment choices.More choices create an opportunity toachieve better investment returns.

Siff Surrender Charges

Most annuities charge a penalty ifyou take your money out during thefirst several years. The surrender periodcan range from 5 to 10 years or longerand the surrender charge will typicallybe 5% to 7% or more. Usually, thesesurrender charges decline each year youown your policy.

What should you do if you alreadyhave an IRA annuity? First, check to seeif the surrender charge period has expired.If so, you can simply rollover yourIRA annuity into a regular IRA. If youwould incur surrender charges to rollover,your best bet is to keep your annuityuntil the surrender period ends andthen do the rollover. Understanding annuitiescan be tricky, so it's best to seekthe help of a qualified financial advisorbefore making a final decision.

Stewart H. Welch III, founder ofthe Welch Group, has been rated 1of the nation's top financial advisorsby Money and Worth. Hewelcomes questions or commentsfrom readers at 800-709-7100 orwww. welchgroup.com. Reprinted with permissionfrom the Birmingham Post Herald. This articlewas taken, in part, from J. K. Lasser's NewRules for Estate and Tax Planning (John Wiley &Sons; 2001), coauthored by Harold Apolinsky,Esq, and Mr. Welch.