You are to be commended on having no debt, an emergency fund, and staying active and young in retirement. I also want to thank you for your service as teachers. Teachers are the backbone of our society and deserve more than the recognition I can give as an individual. my daughter is in her final year of preparation to become one. I am sorry that you are getting such a low return on your life’s savings. it doesn’t sound like it is working very hard for you. here is how you can change that.

While you can annuitize an annuity I would not recommend it if you were my client. when you annuitize an annuity you are giving up the principal ($136,000) for a guaranteed income stream from the insurance company and there is no going back once you do this. it is very, very, permanent! therefore, an annuitization would defeat what you are trying to accomplish which is getting your money out of the annuity. You would also pay taxes on an annual basis on the earnings portion of these payments if it is non-qualified and on the full amount of payments if it is qualified. Qualified means that it is a tax sheltered annuity or TSA which is a possibility since you and your husband were educators. I cannot say for certain without reviewing your documents. You can always call the insurance company if you are not sure.

Additionally, it is a horrible time to consider annuitization if you do not currently need the guaranteed annual income stream that annuitization provides. With interest rates near an all time low the income stream you would receive is not as good as if you waited when rates are higher.

With that said, the next question is whether you should surrender your annuity and roll it over to an IRA since they are paying such a low rate? Surrendering means you are completely cashing in your annuity for a lump sum amount. The first thing you want to look at when determining the answer to this question is the surrender period. The surrender period is the number of years after starting the annuity that you will have money taken from your cash value if you surrender the policy. The surrender percentage can be quite high so it is important to know. You want to know when this period ends as well as the surrender schedule. most insurance company’s surrender schedule is a declining schedule. For example, if you surrender the policy in the first year there is a 7% surrender charge, the next year is 6%, and it keeps declining with each year until the surrender charge reaches zero. This schedule is contained in your annuity documents or can be found by calling the insurance company. Be prepared for them to try and figure out why you are looking at this as it is a warning sign to them that you may move your money.

The next important question to ask when looking at the surrender option is if the annuity is qualified or non-qualified. if it is a non-qualified annuity then you will have to pay taxes upon surrender and rolling it directly over to an IRA is not an option. In this case you can only invest $6000 (using 50+ catchup rules) into each of your IRAs per year. Since you have paid taxes upon surrender you can chose whether to invest in a traditional IRA which grows tax deferred or a Roth IRA which grows tax free. Since I beleive that taxes are going higher in the near future you may want to lean towards the Roth IRA if you feel you won’t need this money for the next five years.

If the annuity is qualified then you can roll it directly over to a traditional IRA with no income taxes. it will continue to grow on a tax deferred basis and preferrably at a much higher rate then you are recieving now. if you feel you would like some or all of this money in a Roth you can always convert the traditional IRA to a Roth IRA once it is established. I would encourage you to use the free Roth vs Traditional IRA calculator on my website to determine which is best for you. A Roth conversion does require you to pay taxes on the amount converted since it will grow tax free going forward. therefore, it is important to consult with your tax advisor and/or a retirement planning expert who can look at your specific needs and tax situation to develop an optimal conversion and investment strategy for you.

If you are in a surrender period with high surrender charges and/or you are in a non-qualified annuity you may want to consider the last option which is a partial withdrawal. Some insurance companies will allow to you to withdrawal up to a certain percentage (usually 10%) of your annuity value each year without a surrender charge even during the surrender period. In the case of a non-qualified annuity there is also an additional benefit. it can spread out your tax impact (avoiding a higher tax bracket) since you are not taking your annuity in a single lump sum in one year. it is important to know that when you do a partial withdrawal that earnings come out before your invested principal. This means that it is possible that in the first few years you may be paying tax on 100% of your withdrawals. However, your later withdrawals would have limited amount of taxes since the majority of it would be return of principal. This could end up being very beneficial if tax rates do indeed go higher in the future. your options with the partial withdrawal proceeds are the same as with a complete surrender.

Kaye, as you can see there is alot of thought that goes into your question. This just touches on some of the key points. I hope you find this information helpful in making a decision that is best for you from a return, income, and tax standpoint. That is what a good certified financial planner (CFP(R)) practioner specializing in retirement planning can do for you by examining your annuity documents, latest tax statements, retirement goals, and overall financial situation. You will walk away with an optimized gameplan geared for success. I wish you and your husband a truly peaceful and golden retirement.

Good Luck and God Bless,

Michael Miller, CFP(R)

Financial Planning Association volunteer recommendations are for informational and educational purposes only. please consult with your financial planner, CPA, or attorney before taking action based on this information. The Financial Planning Association or the volunteers will not be held responsible for any action taken or mistakes posted.

Shoud I Annuitize an Annuity to Roll it Over to an IRA?