Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

February 22, 2013
Is it a good idea to invest in an annuity?

Q: We are both 81 years old. We both have IRAs ($104,000). We are losing about $4,000 a year (from the principal) through our minimum withdrawals, which are about 2.4 percent. My question: Is it a good idea to invest in an annuity?
Victor, Sacramento

A: An annuity is one investment option available for your IRA money, as are mutual funds, certificates of deposit and many other types of investments. Although many wealth advisors recommend against holding an annuity within an IRA, if both of you are in good health and your concern is running out of income, an annuity may be appropriate.

There are two primary reasons why you might want to put your IRA dollars into an annuity. First, you can take advantage of annuitization, creating a stream of income that is guaranteed to last a set period of time, perhaps through the remainder of your life. Most annuities come with an income rider that will allow income for life of around 5 percent or your Required Minimum Distribution (RMD), whichever is higher.

Since you are taking RMD from your IRAs, this would allow you to continue to take the RMD with confidence that, if the account is depleted, the insurance company would continue income payments for either one or two lives.

Second, if you put your IRA money into certain variable annuities, you may be able to get a death benefit guarantee. With this guarantee, your beneficiaries are somewhat shielded against downturns in the market that might lower the value of your investment.
The death benefit guarantee assures that the insurance company will pay (at your death) either the current value or the original principal (minus any withdrawals), whichever is greater. Therefore, your beneficiary can recover your initial investment (minus any withdrawals) if you die after a market downturn that has reduced the value of your investment. If you are uncomfortable with the risk of investing in stock funds, for instance, the death benefit guarantee reduces your risk somewhat, from the perspective of the beneficiary or beneficiaries.

On the other hand, it is important to also understand two strong arguments against putting your IRA money into an annuity.

First, both IRAs and annuities are tax-deferral mechanisms. If you are already deferring taxation by setting up an IRA, you gain no further tax advantage from investing in an annuity.
Second, you are required to pay a mortality and expense fee (generally 1 percent of your investment), along with an annual contract fee for annuities. These fees are on top of any custodial fees that you may be paying for your IRA itself. Over time, this combination of fees may eat away at the growth of your investment.

Also, there are alternatives to annuities, such as Contingent Deferred Annuities (CDAs). CDAs essentially guarantee your income stream for your life (or joint lives) in your IRA or other types of accounts and you don't have to move your money into a variable annuity contract. They can still provide your 4-8 percent guaranteed income stream for life, depending on your age.

After explaining some of the pros and cons of annuities, I want to offer a word of caution. Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.

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