Please advise-Fidelity Personal Retirement Annuity

[filmguyinla]

Upon recommendation of my Fidelity advisor I invested into FPRA last April after continuing to max out my SEP IRA each year. It seems "annuity" is an ugly word but was told this one was different for it has no surrender charge and annual fee is .25%. I keep feeling conflicted as if this was a good idea or not. Looking for independent advice on this. Beginner here so please reply as if you writing a "Investing for Dummies" chapter . 51 yrs old. Thanks in advance.

 

[REWahoo]

Have you read the entire annuity contract? Nothing short of doing that will tell you what costs, fees, charges, commissions, and penalties you've agreed to.

 

[filmguyinla]

No other charges

I have read it and got that reconfirmed from two other so called Fidelity Annuity experts on their 800 number and my advisor. I did ask exactly that multiple times. Are ALL annuities evil? Do most experienced investors avoid ALL of them at all costs?

 

[MasterBlaster]

An annuity will always be more expensive than an equivalent mutual fund. The underlying life insurance for all annuities must be founded by additional fees.

My question for you is.... What exactly is the .25% charge ?

 

[MasterBlaster]

Just a couple comments on annuities.

Higher fees than plain Jane mutual funds

Profits realized at normal (less favrable) income tax rates rather than (favorable) capital gains rates

Death benefit for your heirs not you. You have to die for anyone to collect guarantee on initial investment.

Collection of benefits subject to the financial strength of the insurer perhaps many years hence.

 

[filmguyinla]

.25% is annual fee

They list this as it's Key Features:
Tax-deferred growth potential of investment
Low annual annuity costs
Any earnings not taxed until withdrawn
No surrender charge
The ability to invest as much as you want—no IRS contribution limits3
After the initial investment, you can make automatic monthly contributions.4
Array of 55+ funds, many rated 4 or 5 stars by Morningstar®5

 

[filmguyinla]

Master - agree with your points...

That is exactly why I posted for advice. Is the tax deferred annuity worth it or should I have just put money into my individual account? Or maybe open a Roth IRA?

 

[MasterBlaster]

If you can qualify for a Roth IRA, I would fund that way before ever thinking about annuities.

For me, I just don't see how I can come out ahead with an annuity rather than investing in broad based, very low cost mutual funds.

 

[brewer12345]

Profits realized at normal (less favrable) income tax rates rather than (favorable) capital gains rates

To me, the above is the big gotcha. it isn't clear to me why tax efficient index investments in a taxable account would not be far superior to even the most "benign" VA.

 

[REWahoo]

Array of 55+ funds, many rated 4 or 5 stars by Morningstar®5

What are expense ratios on those funds? Any front end loads?

 

[filmguyinla]

That .25% is expense ratio

As far as I understand it. No front load fee.

 

[REWahoo]

As far as I understand it. No front load fee.

OK, what about expense ratio? An ER of 1% or more is typical of many funds. Add in the .25 fee and you may be paying 6X what you'd pay for a Vanguard or Fidelity fund. That adds up to a substantial cost/drag on your return over time.

 

[filmguyinla]

This is a Fidelity fund.

So the .25 is on top of what else is inside it. For example I have Contrafund at .67% so with the .25 equals to just below 1%.

 

[brewer12345]

So the .25 is on top of what else is inside it. For example I have Contrafund at .67% so with the .25 equals to just below 1%.

So you are paying something like 10 times the fees of an index fund and getting less favorable tax treatment to boot. Sound like a good deal?

 

[filmguyinla]

No that sure doesn't good...

But could explain further about it being less favorable tax wise? Please keep it in simple terms. Thanks.

 

[LOL!]

What is your marginal income tax bracket?

If you are in the 25% tax bracket, then any gains in this VA will be taxed at 25% when you withdraw much like an IRA. But it is worse than an IRA since you paid taxes on the money before you put it in the VA.

OTOH, if you had invested tax-efficiently in a taxable account with index funds, you could pay as little as 0% tax on the gains or at most about 15% tax on the gains.

The math should be compelling: Which tax rate on gains is better? 0%, 15%, or 25%?

Investing tax efficiently in a taxable account also gets you tax-deferral. Unrealized capital gains are not taxed. The taxes are deferred until you realize the gains.

Or investing in a Roth IRA account would be better, too.

Some annuities make sense, but you haven't described any reason whatsoever why this one would make sense. If you were extremely wealthy with high income and had made all possible contributions to IRAs, 401(k)s, etc, and wanted to have more fixed income assets and would invest for 30 years, then a VA might make sense, but even then a low-cost muni-bond fund would probably be better.

Get thee over to bogleheads.org in order to learn about investing in a tax-efficient low-cost way.

With no withdrawal penalty, it may be time to get out of the VA at Fidelity and do something else with the money. However, there is no rush. Don't jump out of one thing into a worse thing.

 

[MasterBlaster]

LOL...

Perhaps a simple way to look at the issue is this....

You pay approximately twice the tax (with caveots) under ordinary income tax rates compared to capital gains.

 

[filmguyinla]

Thanks. Confused where you said...If you are in the 25% tax bracket, then any gains in this VA will be taxed at 25% when you withdraw much like an IRA. But it is worse than an IRA since you paid taxes on the money before you put it in the VA....No taxes paid before for this is a retirement account. Also I may be in 15% tax bracket this year.

 

[LOL!]

If you are in the 15% tax bracket, then long-term capital gains and qualified dividends are taxed at 0%. There is really no need for a VA.

And when you said there were no taxes paid before the money was deposited into this account since this is a retirement account, then that's even worse. There is no need to use a VA if this is a true retirement account. Somehow, I don't think that this is a retirement account like your SEP-IRA though.

 

[filmguyinla]

Well if it's possible you or anyone wants to look at specs....https://www.fidelity.com/annuities/FPRA-variable-annuity/overview
I was told it is very similar to my SEP and very common for those that max out their IRA's and want to put more away. But that is why I joined here to get some other opinions.

 

[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.