What are the benefits of a GMIB retirement vs. Traditional IRA?
I rolled over 401K to a Guaranteed Minimum Income Benefit (GMIB) in 2011
Answers | 2
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.
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.