Please advise-Fidelity Personal Retirement Annuity

[LOL!]

I have accounts at Fidelity. They are always pushing this. It is not something I would ever do.

I think you need to figure out if you are putting money into this thing either before tax (like you do your SEP-IRA) or after tax (like you would a checking account). And then let us know. This difference would be substantial.

Just because something says "for retirement" does not give it special qualities. One can invest in a regular taxable account, get tax deferral on unrealized capital gains, get a better tax rate, pay lower expenses, have no limits on contributions and withdrawals, and no penalties on withdrawals.

I looked at the funds available in your product. None of Fidelity's Spartan Index funds are available. That's a huge red flag to me, too.

[panacea]

I rushed through this one because I'm on my way out for more holiday festivities but did anyone ask about gross income? I would consider paying the extra .25% for this plain vanilla VA for perhaps a portion of your after-tax investing if you have a very high income (over $250,000 married filing jointly and $200,000 filing single I think) and are subject to the additional medicare tax under ACA. But only if you've maxed all other retirement plans first.

[LOL!]

^^The OP mentioned a 15% tax bracket, so one has to suspect that they do not have very high income.

[sengsational]

Generally, I'd agree that the best use of these annuities is when every other tax advantaged account type is maxed-out or not available because of income phase outs. But if that's true and you are young and making a lot of money (high marginal tax rate), then tax deferral over a long span of time can work to your advantage. Yes, absolutely concern yourself with expense ratio differences.

There is one case where it might make sense to turn after tax savings into retirement savings using an annuity, and that's if you've got a kid going to a private university. The FAFSA or Profile formulas don't count retirement assets, so you could get a 20k "discount" or more per year for 4 years, which could easily offset the loss of favorable capital gains treatment. Also, if your time horizon is long, you have to wonder how long the favorable cap gains treatment will last, given the revenue issues faced by our country.

[Ready]

I'm curious, can the OP share with us what led them to choose this annuity in the first place? If it was based on an advisor's recommendation, what was the basis of them recommending an annuity over other types of investments?

Yes, I know some of you will want to reply to this to point out the high commissions earned by the sales people who sell these, but cynicism aside, I'm really curious as to what sequence of events led to the OP selecting this investment choice over the many alternatives out there.

[LOL!]

^^ I know that from the week I contributed the maximum allowed to my Fidelity 401(k) plan that I started to get a monthly e-mail from Fidelity on starting a Fidelity Personal Retirement Annuity. The Fidelity e-mails never mentioned other methods to save for retirement.

[filmguyinla]

What led the Fidelity advisor to choose this annuity was that each year I would max out my SEP and I wanted to put more away for retirement. He said this is what many do in the same situation. Thanks to all that answer, please do consider this particular annuity when responding. I know many annuities have very high fees and are a big sales tool, but is this one is different in that it's fees are very low? Also saw where it's ranked #1 by Barons. I'm not defending it, just seeking impartial feedback on this one as opposed to other annuities. If really bad, is there is any way out, without a huge financial hit to me?

[brewer12345]

Its fees are low by annuity standards, which is like saying you are anorexic for an elephant. At the very least, I would stop contributing money to this monster so that you don't make the problem bigger. Instead, if you want to save additional funds open a taxable brokerage account and buy index ETFs or funds.

[ShortInSeattle]

We got the same pitch at Fidelity. They say if you have already maxed tax deferred vehicles this annuity will allow you to defer more.

BUT:
- Fund choices are limited, and tended to be higher fee funds.
- Contributions are not tax deferred, only earnings.
- There is an expense for the annuity, not a horrible one, but still unnecessary.
- After maxing out our 401(k) and SEP, we figured we may as well build a taxable account to bridge ER and age 59.5 anyway.

We decided it wasn't worth it. Too many downsides for a small benefit.

[Ready]

I think the challenge in giving you meaningful advice here is that none of us know the fine details about this annuity. I've read the web site but it is just marketing fluff. I would imagine you have a contract which gets into the nitty gritty details, which ultimately needs to be analyzed to know what benefits the investment can offer. We know the fee is .25, and that they don't offer low cost index funds, which seems to assure that they will ultimately make much more than .25. But beyond that we don't know much. What rate of return are they guaranteeing? What needs to happen for the rate to be greater than the guaranteed minimum? Were there any up front fees? Is there anything else in the contract that is either vague or concerning to you?

My understanding is that you are investing into this VA with after tax dollars, so it is only the returns that are tax deferred until you begin to withdraw from the annuity. Municipal bonds allows you to invest after tax dollars but have tax free gains, rather than tax deferred. Since they are bonds though, they will not offer the long term potential that equities can offer inside this annuity.

If there is a way to point us to a copy of a boilerplate contract for this VA that we could review, you might find that the members could provide more meaningful feedback.

[LOL!]

The main problem I see with this annuity is that the gains will be taxed at much higher rates than the same money invested tax-efficiently in a taxable account. The fees may be low, but they really are not the bad thing about this: It is the taxes.

Once again, just invest tax-efficiently in a taxable account using tax-efficient index funds. Fidelity has Spartan Advantage index funds if you want to stay at Fidelity.

I had thought the OP had written previously that there was no penalty for early withdrawal of this annuity and no surrender charges. Upon withdrawal one would report any gains as ordinary income and be taxed on those gains. I would suggest trying to do this today or tomorrow so that all the tax stuff is taken care of in tax year 2013 while it is fresh on one's mind and doesn't pollute 2014.

Bottom line: Fidelity advisors are not your friends.

[LOL!]

I also want to point out that investing tax-efficiently in a taxable account is not tax-free. One will pay a small amount of taxes on dividends received each year. But one will not pay taxes on the unrealized capital gains each year.

However, the overall tax benefit is much, much more than using the annuity in 99.99% of instances.

[Hermit]

I don't know your taxable investments situation, but you don't want to be in the situation I am in where don't have any taxable investments when you retire. That can have serious tax consequences both before and after starting SS.

[panacea]

Quote:

Originally Posted by filmguyinla What led the Fidelity advisor to choose this annuity was that each year I would max out my SEP and I wanted to put more away for retirement. He said this is what many do in the same situation. Thanks to all that answer, please do consider this particular annuity when responding. I know many annuities have very high fees and are a big sales tool, but is this one is different in that it's fees are very low? Also saw where it's ranked #1 by Barons. I'm not defending it, just seeking impartial feedback on this one as opposed to other annuities. If really bad, is there is any way out, without a huge financial hit to me?

I think the bottom line on this one is that it's a very good variable annuity as compared to most others, but you simply don't need a variable annuity and furthermore there are potentially real advantages to not having one in your case, from a tax standpoint. Because there are no loads/no surrender fees to get in and out, you should be able to get out any time you want without any financial hit.

[target2019]

I haven't seen a contract for this annuity, but there could be a penalty which declines over the course of 5 years.

Withdrawing from this may not be the best course correction.

I'm wondering about a Roth. Is the earned income too high? Wouldn't a back door IRA work?

[panacea]

Quote:

Originally Posted by target2019 I haven't seen a contract for this annuity, but there could be a penalty which declines over the course of 5 years. Withdrawing from this may not be the best course correction. I'm wondering about a Roth. Is the earned income too high? Wouldn't a back door IRA work?

Nope, no declining penalty because there's no big advisor commission on this product. It's unusual as far as annuities go. No death benefit either. Pretty much just like Vanguard's plain vanilla VA product I think.

The one fee you could run into with getting in and out quick however is some short-term redemption fees with some of the Fido investment choices.

[LOL!]

I think the SEP-IRA counts against the backdoor Roth. As a self-employed person though the OP should probably look into a solo-401(k) if they do not have other employees.

If a solo-401(k) makes sense, then it could be started, the SEP-IRA rolled over into it and then the backdoor Roth becomes a good possibility. What does the OP's accountant say about all this?

[Ready]

Quote:

Originally Posted by LOL! The main problem I see with this annuity is that the gains will be taxed at much higher rates than the same money invested tax-efficiently in a taxable account. The fees may be low, but they really are not the bad thing about this: It is the taxes.

Can you elaborate on this? I thought the main advantage of an annuity is that capital gains and dividends are deferred until money is withdrawn from the annuity. If the OP is still young, this deferral could be for 30+ years. And why would the gains be taxed at anything higher than the CG tax rate at the time of withdrawal?

[LOL!]

Quote:

Originally Posted by Ready Can you elaborate on this? I thought the main advantage of an annuity is that capital gains and dividends are deferred until money is withdrawn from the annuity. If the OP is still young, this deferral could be for 30+ years. And why would the gains be taxed at anything higher than the CG tax rate at the time of withdrawal?

Gains in annuities are tax-deferred just like unrealized capital gains in a taxable account which are also tax-deferred. However, upon withdrawal, gains in annuities are considered ordinary income and are NOT taxed as capital gains. Instead they are taxed at one's marginal income tax rate. In contrast, when one sells and withdraws in a taxable account, any realized long-term capital gains are taxed at a favorable long-term capital gains tax rate which is currently as low as 0%.

To answer your last question explicitly: Because it's the law.

The benefit of a 401(k) or a SEP-IRA is not so much that gains are tax-deferred, but that the money going into the account had no tax taken out of it to begin with. That is not the case with this Fidelity annuity although the OP seems confused by that.

OTOH, a Roth has had taxes paid before putting the money in, but the win is that the gains are tax-free. This annuity does not do that either. Basically, it is a bad idea.

Unfortunately, when someone has been hoodwinked by someone else who may not even understand the tax rules, somebody has to feel bad. And if they feel bad, they regret the decision, but may not do anything about it. It's kinda like learning that one's mom was not all that nice and was a terrible cook also.

[LOL!]

Some folks have advocated using an annuity for asset classes that generate a lot of ordinary income and little capital gains. Such an asset classes would be bonds. That way the monthly bond dividends become tax-deferred and when withdrawn are taxed at essentially the same rate they would have been taxed at if the bonds had not been held in a tax-advantaged account. I don't like to do this since one can just own a tax-exempt muni bond fund instead.