It Pays to Know Your Annuity
By Randy Logan,
WEA Insurance
retirement consultant
June 1998
When you finally reach your “golden” years, what is the last
thing you want to worry about? Money – specifically, getting at the
money you’ve diligently saved and invested during your working years.
Ironically, many tax-sheltered annuity (TSA) providers cause grief for
unsuspecting retirees by restricting access to their money, and even restricting
the way in which retirees can move money from one type of investment to
another within a tax-sheltered annuity.
In this article we’ll tell you about some of the twists TSA accounts
may employ, and we’ll also offer some solutions.
Surrender penalties
The first restriction you need to be aware of is one that involves “surrender”
periods – the period of time during which you can’t withdraw
your money from your account without incurring some type of financial
penalty. Not all TSAs have surrender periods, and people investing in
a TSA with a surrender period may or may not be aware that there is such
a period and that penalties may apply if they withdraw their money early.
When looking at surrender penalties, you need to be especially wary of
those that are for particularly long periods, such as for seven years
or more. Another, particularly confusing type of surrender penalty is
one involving a “rolling” period. As the name suggests, a rolling
surrender period starts a new, full-length surrender period with every
contribution you make. These types of surrender penalties often exasperate
retirees who didn’t “read the fine print.”
Surprises in variable annuities
Many variable annuities offer a fixed account (guaranteed rate of return),
in addition to variable, mutual fund-like investment options. Companies
that offer these variable annuities usually restrict how much money you
may move out of the fixed account at any time. They do this to protect
themselves from massive additions or withdrawals from the fixed account
if interest rates go up or down. Such restrictions may not be a problem
if you understand what your limitations are, but it’s a mighty nasty
surprise if you don’t know in advance that you’re restricted
in the amount of money you can move.
Adding insult to injury, most companies that offer these variable annuities
charge participants an extra fee in the form of an annual “mortality
& expense” (M&E) charge which can be as much as 1.5% of your
annual account value. This M&E charge is an expensive form of “IF”
life insurance – IF your account, upon your death, is worth less
than the amount you’ve contributed to it, your beneficiary would
receive the amount you contributed. Trouble is, this benefit is almost
never worth the fee you pay for it.
Know your TSA
There are ways to avoid such surprise limitations and fees. Learn as
much as you can about the TSA before you open your account. Don’t
wait until you’re enrolled, or, worse yet, until retirement to learn
the finer details of your contract. You can also turn to the WEA TSA Trust
and avoid a lot of headaches.
It was precisely because of such concerns that WEAC decided to create
a special TSA program for its members in the first place. WEAC wanted
to provide its members a TSA without the restrictions, without the extra
expenses, without the penalties, and without the commission-driven hype
surrounding commercial TSAs.
If you have a TSA account with the Trust, you don’t have to worry
about trying to time withdrawals to avoid surrender penalties because
there are none. You also don’t have to pay an “M&E”
charge with the Trust. The WEA TSA Trust does not offer a variable annuity
– rather, it offers no-load mutual funds, so you avoid any extra
fees for “M&E.”
In addition, you get access to a team of professionals who can assist
you with all aspects of your TSA account. You’ll get assistance in
determining the maximum amount you can contribute (excess contributions
can bring IRS penalties), you can find out whether you qualify to make
additional contributions in any given year to “catch up,” and,
when you’re ready to retire, get a rundown on the various options
you have for withdrawing your money.
If you’d like more information about the WEA TSA Trust, or information
on TSAs in general, call the Trust at 1-800-279-4030.
Surrender penalties can add up
Here is an example of a commonly seen surrender charge (sometimes referred
to as an “early withdrawal fee”).
A TSA company offers an annuity that will retain 5% of your account value
if you take your money out within 5 years of the date you put the money
in. Let’s say you’ve accumulated $15,000 in your TSA over a
3-year period, and you decide to transfer to another TSA or take the money
out for retirement purposes. Here’s what would happen to your money:
$15,000 Account balance
- $750 surrender charge (5% of $15,000)
$14,250 cash surrender value.
After paying surrender penalties, you would receive $14,250.
Posted June 12, 1998