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A Few More Annuity Lessons


On Saturday, June 20, 2015, the Van Wie Financial Hour was privileged to have set a new record for listeners’ phone calls.  We also reached a small milestone, as Saturday was our 20th show! Our priority is to serve the public, which is why we do a live, call-in format every week.  Thank you to everyone who called in, it was truly one of our best shows yet.

Since we had so many phone calls Saturday, we wanted to share some additional information on annuities that we have not had a chance yet to discuss on-air.  We will be discussing more aspects of annuity cases in upcoming shows.

Many people ask us if annuities should be held inside an IRA.  Most of the time I believe that annuities have no place in an IRA.  Costs inside an annuity are high.  Part of the reason is that the annuity is a tax-deferred vehicle, but so is the IRA.  Paying double for tax deferral is usually not a good option.  Generally speaking, a self-directed IRA (yes, you can use an advisor on the self-directed IRA) opens up the entire word of investments to the IRA owner.  Annuities generally have fewer choices, and many are confined to insurance companies’ own expensive mutual funds.

As with virtually every rule of thumb, there are exceptions.  Sometimes an IRA annuity may make sense.  But these circumstances are exceptions rather than rules.  Far too many IRA annuities are sold to unsuspecting investors, and many will pay dearly for the bad choice.

Another question that we frequently get is if you have an annuity, can you exchange it for a different annuity?  Yes, you can.  This is called a 1035 Tax-Free Exchange, and is authorized by the U.S. Tax Code (Section 1035, of course).  It simply means that an annuity can be exchanged for a different annuity while preserving the tax status quo.  It also works for life insurance and real estate, subject to certain limitations.  

When considering a 1035 exchange, keep in mind that not all 1035 exchanges are created equally.  Normal annuity sales, including 1035 exchanges, generate commissions.  For that reason, the consumer must be aware of the possible motive behind a salesman’s advice to do an annuity exchange.  In last week’s case, the Van Wie Financial solution involves a commission-free exchange, so the potential commission problem is nonexistent.  The product is from Jefferson National Insurance Co.

The beauty of the Jefferson National annuity is that they offer about 380 no-load investment possibilities, all selected from regular mutual funds available to the public.  Usually, an annuity company’s mutual funds are owned and operated by the company itself, and they are generally inferior to, and more expensive than, the publicly-available funds in a competitive environment called the market.  Jefferson National uses some of the same funds we use in our advisory business.

The new Jefferson product can be professionally managed, even by fee-only planners.  This is the only product of this nature that we are aware of.  There is no need to go to someone with an insurance license.  Any advisor who accepts commissions opens the door to potential conflicts of interest.  Fee-only advisors assume fiduciary responsibility, mandating the planner to put the client’s interests ahead of their own.  We do that.  We are fiduciaries.  And we never get commissions or referral fees.

And finally, remember that 90% of the biggest companies using the term “fee-only” aren’t, according to a recent study.  If you are unsure, ASK!

Investment decisions are only one aspect of the financial planning process.  There are many reasons to use a qualified, fee-only Certified Financial Planner for your long-term relationship.  If you aren’t using a fee-only CFP, and if you think that you could benefit from a no-obligation consultation, our number is 904-685-1505.

Van Wie Financial is fee-only.  Always.