© St. Petersburg Times, published April 13, 2003
If you own an annuity and are thinking about swapping it for a better one, watch out.
Many annuity salespeople promote what is known as a "1035 exchange." This is a provision of the tax code that makes it possible to swap one annuity for another or to trade a life insurance policy for an annuity without having to pay income taxes on the transaction.
But the fact that a transaction is tax-free does not automatically make it a good deal. Since annuities vary, the new product might be better or worse than the one you have. Even if it is better, it may not be enough of an improvement to justify the drawbacks of switching.
Read the fine print yourself or get help evaluating the switch from a more objective source than the annuity salesperson. Remember that the person selling an annuity earns a commission. (And while you're at it, ask how much the commission is.)
Also ask yourself whether you really need or want the touted benefits of the new annuity and whether they are worth the costs involved.
Here are three points on which to compare the old and new annuities:
Surrender penalties. Will the exchange trigger a surrender penalty on your old annuity? What kind of surrender penalty does the new annuity have? By exchanging will you be locking up your money far longer than you would by retaining the old annuity? If it is a fixed annuity, does the surrender penalty last longer than the interest-rate guarantee?
Fees and expenses. "Bonus" interest rates and other special features of the new annuity may be offset by higher costs.
Death benefit. Some variable annuities guarantee a death benefit based on the initial purchase price or on a higher market value attained after purchase. With the decline in the stock market, these annuities often have a death benefit higher than their contract value. If you exchange at the contract value, you give away the higher death benefit.
Don't count on regulators to protect you. Although the Securities and Exchange Commission and the National Association of Securities Dealers (NASD) are concerned about abuses in the sale of variable annuities, they usually step in after the damage has been done.
Investors generally have to file an arbitration claim to recover damages. In one recent case, an arbitration panel for the NASD awarded the estate of a Seminole man $192,506. He was sold 13 annuities, some involving exchanges, which incurred significant surrender penalties and commissions.
Q. I inherited a 401(k) and several IRAs. There is a lot of literature out concerning how to handle inherited IRAs so I have had no problem getting my IRA questions answered. However, I can find nothing on how to handle an inherited 401(k) plan. Where can I go? Several friends have asked me about this, so I know it's of some broader interest.
The reason you don't see much written on this is that the options for beneficiaries vary with the rules of the plan. A plan theoretically could allow you to stretch distributions over your lifetime, but it is very unlikely to do so, said Ed Slott, author of The Retirement Savings Time Bomb and How to Defuse It. You may be allowed to spread distributions over five years at most, he said. To find out what choices you have, your best bet is to call the plan administrator.
If the 401(k) plan belonged to your spouse, you can take your cash payout and roll it over to your own IRA to defer taxes. Otherwise, it is not eligible for rollover.
Because IRA rules are more flexible, Slott recommends that retirees roll over their employer-sponsored retirement plans to an IRA when they retire.
Q. I paid off my mortgage years ago. Now I want to remortgage my house. I heard that interest on a new loan is not deductible if you previously paid off an old loan. Is this true?
No. If you get a new mortgage, the interest will be deductible. What you probably heard is that "points" paid to obtain a mortgage are deductible all at once only when you first purchase your home. For later mortgages, such as the one you are contemplating, the deduction for points is spread out over the term of the mortgage.
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.