Individual Retirement Arrangement (IRA) is the foremost retirement planning tool since the time it came into existence almost three decades ago. Within the IRA umbrella it's possible to use any type of investment plan aside from life insurance, commodities futures, collectibles and several kinds of coins. Because the amount of money held in IRA accounts is in the trillions of dollars, many sellers of financial products and services are attracted by the opportunity. Life insurance agents, that do not have a securities license, will attempt to sell their products as IRA investments. Because life insurance may not be held in an IRA, a fixed retirement annuity is often recommended.
Just because an investment can be permissible within an IRA this doesn't necessarily mean that it is beneficial. A matter for debate is whether annuities work as investment vehicles to reside within IRAs since annuities are inherently tax deferred savings. However, so are IRAs. So why would one desire to take a form of tax deferred saving and include it inside another tax deferred plan? It is simply not reasonable. However, in spite of its apparent flaw, a great many insurance companies and agents tend to be overly enthusiastic about a retirement annuity.
It may be very difficult to justify a retirement annuity as an IRA investment. The arguments in favor of such a choice would include:
a) the fact that a retirement annuity will make fixed monthly payments for life as opposed to any type of security which will not have the same degree of certainty
b) eliminating any investment choices and potential confusion on the part of the IRA owner by having a very simple instrument in their account
In the case of variable annuities, an IRA retirement annuity has greater justification. Variable annuities offer a range of insurance and money-management capabilities that are not included in other opportunities. Options such as periodic stock portfolio re-balancing, systematic distribution plans, and living and death benefits for heirs tend to be standard features in all contemporary variable annuity contracts. the modern variable annuities also offers guarantee such is the guaranteed minimum payment option or the guaranteed minimum income benefit option which mutual funds do not offer. Note that there is a cost to the investor for these additional guarantees.
To put it differently, there is more to a variable annuity as compared to fixed annuity which can justify its being used as an IRA retirement annuity.
To generate a sound decision, it is important to look at the entire range of benefits which an opportunity offers and not merely look at one or two features. It can also be important to remember that variable annuities are be subject to insurance related costs (mortality expenses) and investment management fees associated with the sub-accounts.
There is a saying in the investment industry that "investments are sold and not bought." It is the author's view that most retirement annuities are in IRAs because of something an advisor or agent sold, rather than this being a good investment choice.
Leave a Reply