SAVING FOR RETIREMENT Dealing With a Bad Situation by Kimberly Lankford
If you're convinced that you made a mistake when you bought a variable annuity, what
should you do?
It's rarely worth paying the 10% tax penalty to get out before age 59½. But that
doesn't mean you're locked into the same policy until then. It does mean that you'll have
to do more shopping in the variable-annuity marketplace. Once most of the surrender period
is over -- so you don't forfeit as much as 5% to 9% of your principal -- you can make a
tax-free exchange (called a 1035 exchange) to another variable annuity that has lower fees
and better performance. As with an IRA rollover, the money must move directly from one
annuity company to the other to avoid the tax hit.
If you're older than 59½, you need to get a fix on the tax liability you would face
if you cashed in the policy. Remember, the difference between what you invested and the
current value will be taxed in your top bracket. It's possible that the high tax cost of
cashing in will make the ongoing annuity fees seem a small price to pay to keep all your
money working for you.
You may want to begin tapping the annuity rather than other sources -- such as an IRA
-- as your income needs require. Although traditional-IRA withdrawals are generally fully
taxable as are annuity payouts, those accounts don't carry the extra fees associated with
annuities.
GETTING STARTED
