Q. I bought an annuity a couple of years ago with part of my roll-over IRA and have decided it was a big mistake. I called the guy I bought it from (after a free dinner seminar of course) and told him I wanted to get out and he told me that my 30-day free look period was over and if I got out of it the surrender charges would be over 12 percent of the purchase amount. It looks like I’m stuck with this for several more years unless I want to lose a lot of money due to the surrender charges.
I recently read through the lengthy confusing contract/prospectus and from what I can understand, I may have a way to get out sooner than later. I just turned 70 1/2 so my required minimum distributions (RMDs) begin this year. I’ve read that I can take my total RMD amount from one or from each of my IRAs, please confirm this for me. The annuity contract says that RMDs are allowed to be taken without being subject to any surrender charges. I have another large IRA so my thought is to take my total RMDs from the annuity which will allow me to deplete the annuity at an accelerated rate and avoid the surrender charges.
A. You are correct that you can take your RMDs from one or from several IRAs. You just need to make sure that the entire RMD amount is taken regardless from multiple or one IRA because any missed amount will be subject to 50 percent penalty in addition to income taxes.
Your idea is clever but I don’t think it will work. You could call “the guy” from whom you bought the annuity and ask him if taking a RMD from your annuity based on the values of your non-annuity IRAs would be exempt from the annuity surrender charges. I doubt if the issuing insurance company will allow this since they have already paid “the guy” a handsome commission. They need to keep your money for a certain period of time in order to compensate them for the commission they paid to the agent/planner, “the guy.”
Most annuities will allow a 10 percent annual withdrawal not subject to the surrender charges. Ten percent of the IRA annuity value is probably more than 2.5 times the RMD amount from the annuity. If your annuity allows the 10 percent penalty free withdrawal, take the 10 percent each year and reduce the amount of RMD from your other IRA(s) by the amount taken from the annuity. You’re not the only one to realize that a free dinner can end up costing quite a bit and resulting in the purchase of a costly investment/insurance product.
I’ve never understood the lure of the free dinner seminar. Isn’t it logical that the only reason a person would want to invite you and others to an “educational” seminar and pay for everyone’s dinner is because of the opportunity to sell a product to a certain percentage of the attendees? The commission from the product sold to this percentage will more than cover the cost of everyone’s meals or they wouldn’t continue to offer the free dinner seminars.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624