Ask the Expert ~ Cashing in Annuities for a Better Investment Vehicle

I am a retired physician doing a lot of charity and mission work. I have several annuities that were sold to me when I was still active in private practice. I would like to cash them out one by one so I can put them in better investments, those that are not paying for maintenance, like blue chip stocks.

I know that I have to pay taxes on any gains achieved, but right now there is not much gain on those annuities (there may be none at all). Also I am now in a lower tax bracket than when I was practicing.

Mike Doran - Market Pulse

Annuities can be expensive and are typically inflexible, requiring the investor to stay fully invested. During bear markets flexibility in raising cash is important and the investor cannot always make timely allocation decisions during market adversity.

There are early withdrawal provisions that can be onerous, and reading over the annuity contract with a qualified financial advisor is important before liquidation. Back end and up front loads and annual fees can be a serious drag on annuity performance. Combined with the usual buy and hold mentality of some advisors can create a situation where the annuity has lost alot of value due to erasing any tax benefit.

The investment selections in most annuities have, in a number of cases, under performed average mutual funds. The performance history must be analyzed carefully, along with the risk of the underlying portfolio manager-initiated changes, which must be monitored by the investor or his/her financial advisor.

Sometimes these annuties can be rolled into other retirment vehicles so as not to trigger taxable consequences. Tax considerations must be factored into liquidation of annuities, but since I do not know the particulars of your tax situation, that requires a face to face meeting with a qualified advisor that is not in the sole business of selling annuities.

Shirley Mueller - My Money MD

Instead of saying, “Goodbye” to your annuities, first say, “Hello.”

By this I mean: get to know them better before cashing out any or all. Doing so may take some time, but will work toward your own best interests.

This is because there are so many different kinds of annuities with specific implications, and you didn’t detail them in your query. Without a careful examination, you could hurt yourself by making a blanket judgment that all should be cashed out.

The best way to accomplish this is to see a fee-only financial planner who has no vested interest in the annuities. She or he can help you determine if any are worth keeping and if so, when to begin distributions.

Without this personal involvement on your part and a planner, any advice I or someone else could give you would be based on too little knowledge of your unique situation.

Good luck. As a fellow physician, I am in sympathy with your situation. You have worked hard for your money and you deserve to keep it.

To do that, however, may require some further personal energy to assure that if anything is to be gained from the annuities that you have, you receive it before throwing them away without due diligence.

Bill Houck - Modera Wealth Management

There are multiple items to consider when evaluating a possible annuity distribution, or evaluating the surrender of an existing annuity contract.

First, you need to check for surrender charges, early withdrawal tax penalties and the tax treatment of the withdrawals. Annuities typically have surrender charges that can range anywhere from 6 to 12 years from the initial purchase date and in some cases, from the most recent contribution.

Next, if you are under the age of 59 1/2, you may have to pay a 10% tax penalty on your withdrawals.

Finally, you need to check the tax consequences of the withdrawals. The tax treatment of withdrawals is ordinary income, not capital gains. By researching these items, you can help safeguard yourself against a major fee, penalty, or tax.

Investors who run into large tax issues might consider a 1035 exchange to a low cost annuity provider. A 1035 exchange is a tax free exchange from one annuity to another. This will allow the investor to better control expenses, which could translate into higher returns over time.

If you decide on a 1035 exchange, you will want to make sure you research the health of the insurance company and verify your state insurance regulators' guarantees. Many regulators do not ensure against all the risks a variable annuity contract holder may face if the insurance company fails.

If there are not any fees or penalties upon withdrawal, and considering you are now in a low tax bracket, then it would make sense to consider a diversified asset allocation of low cost mutual funds that is consistent with your objectives, risk tolerance and time horizon.

For most individual investors, we at Modera Wealth Management find that annuities are better served using a diversified low-cost approach. This approach will allow you to focus on what you can control - your risk, your expenses and your taxes.

In addition, if you are charitably inclined, then owning investments in a non-annuity will provide you with flexibility. You will have flexibility to gift appreciated assets to charity or fund advanced charitable strategies, depending on your estate planning objectives.

To sum up, if the purpose of the these investments is for long term investing to meet your wealth planning objectives, then we would recommend you consider low cost mutual funds.

It should be noted that we recommend you complete a comprehensive financial plan before making decisions about how to structure your portfolio. This will help you to better understand your financial situation so that you may make more informed financial decisions.

This information and content is offered for informative and educational purposes only. The authors are not acting as Registered Investment Advisors, Investment Counsels, Tax Advisors, or Legal Advisors.