What are the benefits of a GMIB retirement vs. Traditional IRA?

I rolled over 401K to a Guaranteed Minimum Income Benefit (GMIB) in 2011

Asked by Yvette

2 Answers

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Answered by Stacy Marcus, CDFA™ CFEI™ in New York, NY
Yvette, I hope you received qualified professional tax and financial planning advice when you made the decision to roll over your 401(k) into an annuity. The terms and fees of annuities are complex and each annuity may have unique riders. Certain annuities offer a guaranteed guaranteed minimum income benefit rider, or GMIB. It is important to consider whether this benefit is as as good as it initially appears.

In general, variable annuities are supplemental retirement vehicles to be bought only after you can answer "yes" to these questions: 1- Do you max out your 401-K or other workplace retirement plan every year? 2-Do you contribute the maximum each year to an Individual Retirement Account (IRA)? Why? Most variable annuities simply cost too much and have tax consequences which reduce the anticipated benefit. According to Expertlaw.com, Morningstar reports the average variable annuity passes along expenses of 2.2 percent of the assets per year. The impact of this fee is illustrated as follows: Assume you invest $3,000 a year in a variable annuity generating a yearly 8 percent return before expenses. At the end of a 25-year period, your annuity would have grown to $168,012. But if you had put the $3,000 into tax-efficient index mutual funds, charging a low 0.20 percent the index fund would be worth $230,172 - a difference of $69,160.

There are also tax implications at withdrawal. Salesmen boast you won't pay taxes on the money that's growing inside an annuity, because its "tax deferred". That's true, but you'll owe ordinary income taxes on every dollar of annuity withdrawals. Comparison with investment in a taxable account illustrates the significant impact of paying ordinary income tax. In a taxable account withdrawals would be taxed at long-term capital gains rates, which is only 15% for most taxpayers, but could approach 0%. If you are in a 35% ordinary income tax bracket and you have a variable annuity you will pay $350 in taxes for every $1,000 you withdraw. In a taxable account you'd pay no more than $150 for every $1.000 withdrawal.

Please consult with your tax and financial professional to ensure this is an appropriate part of your overall financial plan. | 10.06.15 @ 01:11
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$commenter.renderDisplayableName() — {comment} | 12.09.16 @ 20:03
Answered by James Kinney, Financial Adviser in Bridgewater, NJ
They are two different things. A GMIB (guaranteed minimum income benefit) is a feature found in some variable annuities which promise that, even if the investments in your annuity underperform, you will have some larger amount of money (benefit base) which you can access IF you agree only to take the money as an income stream over time. So lets say you invest $100k. After 10 years the investments are only worth $95,000 because the market crashed. You can take out $95,000 with no strings attached. However, during that same time, the insurance contract was computing a separate amount which per the terms of the contract may have grown to $150,000 per year. Wow, you might think - I'll take the $150k. Not so fast. You can have it - but only if you agree to ONLY take the money in income payments spread over the rest of your life.

The above contract could very well be in an IRA, in fact, it certainly is because you rolled over your 401k into it. That simply means that the money was put in before tax, so when you take the money out, you will owe income tax on the entire amount.

The contracts are very complicated. If you don't understand the terms, call their customer service line and ask them to explain the features to you in plain English. In my experience, you get better answers from the call center folks than you do from the salesman. | 10.07.15 @ 01:39
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$commenter.renderDisplayableName() — {comment} | 12.09.16 @ 20:03
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