Cash out NWM variable annuity?

[Atlas Axis]

A close family member had a 401k worth about $125k in 2012 which a NWM agent transferred into a NWM Flexible Payment Variable Annuity Account B (prospectus here) at that time. I believe this is a "back load" contract.

Today (a full 6 years later) the annuity is worth about 175k.

As I understand the fee structure, there are annual fees of 1.25% (prospectus page 2) on the whole account.

On top of those fees within the VA, the agent has the money invested in high fee mutual funds, with expense ratios ranging between 0.4% and 1.1%.

My family member's annual income is about 200k/year and they are 37 years old.

 

What would you recommend? Should they keep the money in the VA at this point? I have been trying to think about the ramifications of them surrounding the account and them managing it as a DIY investor.

 

FWIW, based on how I read the prospectus, the surrender fee would be about $2k. (Surrender fee percentage is 8 - number of years you have held the annuity on the first 100k; so 8-6 = 2% of 100k = $2k.)

Issues I have thought of regarding surrendering the VA:

1. They have to pay a $2k surrender fee

2. They would have to take this 170k as a distribution and get taxed as regular income (probably about $45k or $50k tax bill based on their tax bracket). Ouch!

3. The money would be invested in a taxable account in index funds.

4. Using internet calculators, based on time value of money, after 25 years 125k invested without the ~1.5 to ~2% fees beats the 175k kept in the VA.

 

What else am I not thinking of?

 

Thanks!

 

[Craigy]

IMO be careful talking a "close family member" into paying $50k of tax.

Is said family member coming to you for advice?  Or is this more or less unsolicited?

[Atlas Axis]

I was asked for the advice.

But I agree with you this is dangerous water to be treading on with family.

What they really need is a reputable fee based financial adviser.

[cgossage]

Atlas Axis wrote:

A close family member had a 401k worth about $125k in 2012 which a NWM agent transferred into a NWM Flexible Payment Variable Annuity Account B (prospectus here) at that time. I believe this is a “back load” contract.

Today (a full 6 years later) the annuity is worth about 175k.

As I understand the fee structure, there are annual fees of 1.25% (prospectus page 2) on the whole account.

On top of those fees within the VA, the agent has the money invested in high fee mutual funds, with expense ratios ranging between 0.4% and 1.1%.

My family member’s annual income is about 200k/year and they are 37 years old.

 

What would you recommend? Should they keep the money in the VA at this point? I have been trying to think about the ramifications of them surrounding the account and them managing it as a DIY investor.

 

FWIW, based on how I read the prospectus, the surrender fee would be about $2k. (Surrender fee percentage is 8 – number of years you have held the annuity on the first 100k; so 8-6 = 2% of 100k = $2k.)

Issues I have thought of regarding surrendering the VA:

1. They have to pay a $2k surrender fee

2. They would have to take this 170k as a distribution and get taxed as regular income (probably about $45k or $50k tax bill based on their tax bracket). Ouch!

3. The money would be invested in a taxable account in index funds.

4. Using internet calculators, based on time value of money, after 25 years 125k invested without the ~1.5 to ~2% fees beats the 175k kept in the VA.

 

What else am I not thinking of?

 

Thanks!

 

Click to expand...

If it is within an IRA (which I'm guessing it is since it was invested using 403(b) funds) it would make the most sense to roll it over to an IRA and deal with the $2k surrender fee.  Your family member could also do a 1035 exchange to a lower cost Variable Annuity through Vanguard if the IRA rollover is not an option.  Like you stated, I don't think your family member wants to take the tax hit on $170k.

 

[jfoxcpacfp]

Your family member should roll the current annuity into a no-load annuity. We have used Jefferson National when clients have come to us with variable annuities and have been very happy with them. It wouldn't be much different from the taxable account except s/he would maintain the annuity wrapper and can avoid the big tax hit. It charges $20/mo for an "insurance fee".

Here is a story about JeffNat that you may find helpful. I believe they work directly with consumers in addition to their advisor network. I'm sure it's a little more complicated than I've laid out above (my partner handles the investing so I don't know all the details) but it's far better than cashing out the annuity.

[Atlas Axis]

So you guys are saying Variable Annuities are transferable?

So they could take the VA at NWM and with not too much trouble (pay the surrender fee) get a much lower fee VA at another company?

Wow!

Hey that's great news!

It looks like Vanguard has VA and a mechanism to transfer it.

Thank you!

 

[jfoxcpacfp]

Yes, they're transferable.

No, you can't contribute an "investment" to an IRA. You must make a personal contribution, limited to $5,500/yr/person + another $1k/yr/person beginning at age 50. You can roll qualified retirement funds into an IRA, but a VA is not such an animal.

[cgossage]

Atlas Axis wrote:

So you guys are saying Variable Annuities are transferable?

So they could take the VA at NWM and with not too much trouble (pay the surrender fee) get a much lower fee VA at another company?

Wow!

Hey that’s great news!

It looks like Vanguard has VA and a mechanism to transfer it.

Thank you!

 

Click to expand...

Yes.  You can use a 1035 exchange like you found on Vanguard's site.  They are very low cost as well.

[Atlas Axis]

Update: Ok so I just called Vanguard's annuities department and they said that if this is a pretax VA in an IRA they could transfer it into an traditional IRA at Vanguard.

 

Johanna, based on your response, it sounds like you don't think this move is possible.

 

I find the status of this VA confusing... I'm pretty sure its not "in" an IRA anymore...  I think the NWM agent took it out of the 401k and put it in this VA as an investment... so like you say Johanna I am pretty sure it is an "investment" outside of an IRA. If that is true than I presume it's not possible to get the genie back in the bottle and roll it over into a traditional IRA, correct? What a drag.

 

Thank you for the information!

[jfoxcpacfp]

Atlas Axis wrote:

Update: Ok so I just called Vanguard’s annuities department and they said that if this is a pretax VA in an IRA they could transfer it into an traditional IRA at Vanguard.

Johanna, based on your response, it sounds like you don’t think this move is possible.

I find the status of this VA confusing… I’m pretty sure its not “in” an IRA anymore…  I think the NWM agent took it out of the 401k and put it in this VA as an investment… so like you say Johanna I am pretty sure it is an “investment” outside of an IRA. If that is true than I presume it’s not possible to get the genie back in the bottle and roll it over into a traditional IRA, correct? What a drag.

 

Click to expand...

If it's in an IRA, you should be fine. I just re-read your original post, and the $ came from a 401k. Surely it was not a cash-out but a rollover. You need to find out, should be able to tell from the investment statement. If it was taken out of the retirement vehicle and then invested, no, you can't get the genie back in the bottle. However, maybe it will turn out to be an annuity in an IRA. Ugh.

[cgossage]

Atlas Axis wrote:

Update: Ok so I just called Vanguard’s annuities department and they said that if this is a pretax VA in an IRA they could transfer it into an traditional IRA at Vanguard.

 

Johanna, based on your response, it sounds like you don’t think this move is possible.

 

I find the status of this VA confusing… I’m pretty sure its not “in” an IRA anymore…  I think the NWM agent took it out of the 401k and put it in this VA as an investment… so like you say Johanna I am pretty sure it is an “investment” outside of an IRA. If that is true than I presume it’s not possible to get the genie back in the bottle and roll it over into a traditional IRA, correct? What a drag.

 

Thank you for the information!

Click to expand...

I'm hoping NWM had enough sense to roll it over to a IRA.  If they did not roll it over but took a withdrawal from the 401k, there would have been significant taxes paid at the time.  Based on the facts you listed above, I'm still guessing it was rolled over and could now be rolled into a Vanguard or any other IRA.