Dear Dr. Don,
I recently had my broker sell my $16,000 IRA investment and invest the proceeds into a mutual fund.
The account had been invested in a variable annuity -- although I had no idea what that meant in 1999, when I rolled this money from an IRA CD from a local bank.
When I discovered it was in an annuity and wanted out, I was told that surrender charges would apply. I was also told that if I waited for a couple of years, I would not have to pay the surrender charges and that my investment would begin to grow after the market "corrected." I waited, but the market never corrected.
Needless to say, I made no money on this investment and feel lucky that I at least got most of what I put into it -- although, if I had left it in the IRA CD at my local bank, I would have at least doubled my money. I am 62 years old and self-employed with no other retirement plan except Social Security.
My question is in three parts:
Can I roll this money into Treasury
inflation-protected security notes myself (through
TreasuryDirect) and get the protection of the
IRA account as far as deferred taxes?
Does any mutual fund offer an IRA investor-only fund so that the fund can aggressively invest without the worry of that year's tax consequences to its investors? It seems to me that IRA investors' goals would be much different from someone paying ordinary income taxes on each year's earnings.
My wife and I now report about $49,000 in adjusted joint taxable income now. Because I am 62, would it be better to go ahead and pay the tax on the IRA and have the freedom to invest in any vehicle that I choose, especially shorter-term investments?
My personal feeling is that IRA accounts get smaller returns because the banks know that you are not going to shop around and are likely to roll them over to avoid all the paperwork required to move your money. Is this a valid conclusion?
-- Eddy Eclectic
While it's water under the bridge in your situation, I'm not a fan of buying variable annuities within a tax-advantaged retirement account. You don't need the tax deferral of the variable annuity and you pay for an insurance component that isn't all that valuable in the account. Other account fees and expenses create a drag on your investment returns.
Treasury inflation-protected securities,
known as TIPS, can be good choice for tax-advantaged
retirement accounts like a traditional IRA. Unfortunately,
you can't buy them using TreasuryDirect because
a TreasuryDirect account isn't, and can't be,
an IRA account. You can use your brokerage account
to buy these securities.
An alternative to owning them as
individual securities is to own them in a mutual
fund such as the Vanguard Inflation-Protected
Securities Fund (VIPSX). In the interest of full
disclosure, my wife owns some VIPSX in her 401(k).
Taking the money out of the tax-advantaged account, paying the taxes and sticking the money in a taxable account is the wrong thing to do. You could consider converting your traditional IRA to a Roth IRA. If you do that, you'll owe income taxes on the conversion. If a conversion makes sense, you should fund the taxes with funds other than your IRA monies so the entire $16,000 can stay invested. Consult with your tax professional before making the decision to convert the account.
I don't fully agree with your point of view that IRA accounts get smaller returns because investors aren't willing to move the accounts and that the account custodians know it and take advantage of that inertia. I understand the inertia part but don't think the custodians are trying to take advantage of it.
I take an opposite perspective; that too many people aren't investing for retirement because they're afraid they'll make a bad decision when it's fairly easy to move the funds if you decide you need to.
It's easy to move the accounts -- as long as you're not paying variable annuity surrender charges. I'm in the process of moving an IRA to a new custodian and it's not a big deal.