I put $50,000 in two variable, non-qualified annuities three years ago. I have four more years to go without having to pay the $2,200 in an early withdrawal fee. Would it be wise to move to fixed index annuities with or without bonus to protect my investments?
"If you liquidate your variable annuities completely, you would be assessed those charges," said FPA member, Frederick D. Orr, CFP®, of Pivotal Financial Advisors. Given that, you should examine whether there's a provision in your variable annuity contracts to take partial liquidations without being assessed those surrender charges. "But please understand that any liquidation, partial or total, could have tax consequences and early withdrawal penalties if made prior to age 59½," he said.
"To liquidate your annuity completely would be costly," Orr said. "Then, if you moved it into another annuity the new annuity would probably have a longer surrender charge than your current annuity. If the equity indexed annuity has a bonus provision that means that the surrender charge period has been extended for a longer period of time."
Instead of liquidating, Orr said you might consider this option: "You can rearrange the sub-accounts within the annuity to help you reduce your exposure to asset classes that have been volatile lately. This rearrangement would not incur any additional taxes or penalties."
Orr suggested that another option to consider would be a 1035 exchange. "Doing so would minimize the tax and penalty situation," he said.
"Your seemingly simple question has many factors to consider before making an informed choice," Orr said. "On the surface, I would say do not make the change until you consider some, if not all, of the preceding points."
In addition, Orr encourages you to go through a complete financial planning process that aligns your goals and values with your financial situation and only then make any changes or new purchases of financial products if appropriate.