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Jewish World Review March 8, 2005 /27 Adar I, 5765

Jan L. Warner & Jan Collins

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Consumer Reports

Step away from that lying bank | Q: My wife and I have just more than $400,000 total in our IRAs, and have been investing in certificates of deposit (called "laddered" CDs) with our local bank. Generally, one-fourth of our CDs come due every year, and we roll them over with the interest. This past week, we received a call from a bank representative who told us that, based on the dividend tax cut, my wife and I would be better off putting the $100,000 that is coming due into a variable annuity that is guaranteed not to lose money. In this way, he told us, we could get a higher interest rate than the CDs would pay and grow our IRAs faster.

My wife is 68 and I just turned 70. We were somewhat skeptical because it seemed to be too good to be true, so we decided to write you because we believe you are unbiased and will steer us straight. What would you do?

A: If we were you, we would find another banking relationship. It's unfortunate that some banks feel the need to tell lies and half-truths to their loyal customers — especially seniors — in the name of earning more fees.

First, being told that you'll benefit from the dividend tax cut if you purchase an annuity is a flat lie, similar proponents of the "dividend tax cut" say that it will help middle-class Americans. Hogwash! Statistically, just over half of all Americans own any stock at all, and most of these folks have their stock holdings tied up in their 401(k) plans and IRAs, which, due to the deferral of taxable income, will not receive any benefit from the dividend tax cut.

Second, the purchase of a variable annuity inside an IRA results in no economic benefit that we are aware of. Your IRA is already tax-deferred, so why should anyone in his or her right mind purchase a tax-deferred variable annuity inside a tax-deferred IRA? In truth — of which you are receiving very little from your banker — the downside can be significant because the expenses associated with the deferred annuity are greater than will ever be explained to you.

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In our opinion, even the suggestion that you purchase a variable annuity inside your IRA indicates that the banker is looking out for his best interests — not yours — because of the commission to be earned. There is no economic justification to sell you this product, especially when you think about the fact that the annuity company is investing your money in the stock market, something that you clearly don't want to do given your history of using certificates of deposit. And, by the way, the "guarantee against loss" that you are being told about really means that if your account loses money, your beneficiary will not lose money if the annuity is kept until you die. This is because part of the expense you are unwittingly paying is a life insurance component.

Lastly, if you purchase the annuity, you will be told that there is no cost to you up front, but the rest of the story is generally not disclosed. Let's say, for example, that you decide after a year or two to sell the annuity because it is not performing well. Your IRA will be hit with surrender charges, that is, a "back-end load" that can exceed 8 percent, depending on the terms of the particular contract. While these sales costs may be disclosed to you, they are not stressed, meaning that the annuity is not an appropriate option for folks who, for one reason or another, may need access to their investment through liquidation in the short term before the sales charges evaporate over time.

While annuities may have their place, it's not in IRAs or other tax-deferred accounts. So make sure to read and understand the entire contract before you sign on the line.

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JAN L. WARNER received his A.B. and J.D. degrees from the University of South Carolina and earned a Master of Legal Letters (L.L.M.) in Taxation from the Emory University School of Law in Atlanta, Georgia. He is a frequent lecturer at legal education and public information programs throughout the United States. His articles have been published in national and state legal publications. Jan Collins began co-authoring Flying SoloŽ in 1989. She has more than 27 years of experience as a journalist, writer, and editor. To comment or ask a question, please click here.


Gambling on long-term care insurance; poor dental health in nursing home
Mom may have written me out of her will
Ensuring gifts to grandkids are used for college
Readers rail against politicians; homes showing less restraint
Can I be paid from my uncle's cash?
How can we afford my husband's rehab?
Rule your money from the grave
Planning from a distance
Our fight to improve Mom's care
The long path to deducting at-home care
Getting respite for adult caregivers
Do we tell the kids they're not in our plan?
HIPAA hurts careless life planners
Son's sins infect Mom's care
The sudden pitfalls of an immediate annuity
Furious at home's poor care of Mom
How the government bilks seniors
Solid answers about osteoporosis
The taxing affair of gift giving
Searching for a facility that offers independence
Does anesthesia enfeeble the elderly?
Warning about 'Do Not Resuscitate' (DNR)
Why is Mom such a hoarder?; Medicaid law may leave child homeless
Brother's reaction to Mom's death angers siblings
Unwisely reducing drug dosages
Why is my sick husband frantic at sundown?
Are Dad's living expenses tax-deductible?
Recovering confidence after a fall
How do I plan my estate?
My parents need a caring lawyer
Can banks reject powers of attorney?
Tech innovations help parents remain home
Looking back for a healthy future
Alzheimer's-stricken Mom is destroying marriage
A cautionary tale of quick-fix mortgages
Why can dad's new wife control his life?
Sister's early death sparks family estate war
Poor financial planning leaves Dad cash-strapped
How do I protect my parents from falling?

Bad 'Will' makes seniors prey
Bankrupt seniors now the debt generation
How can we help ease Dad's depression?
Compensating sister for Mom's care; purchasing life insurance policies from terminally ill individuals
My aunt profited from grandpa's weak will; foreclosing against senior is best
Pay employer taxes for caregivers?
Help Mom organize her finances
Where can seniors get the best health info?
How do we stop our mooching daughter?
Can you stop a double-dealing lawyer?; caregiver red flags
How the government bilks seniors
Dad's new wife took the inheritance
Parents' trustee choice a hidden blessing
Finding the money for home care
Elderly mom is sweet on a hunky aide
'Ziva' gets the scoop on nation's nursing homes
Care decisions for 'elder orphans'
Seeking help for dementia victims
Read admission-package 'agreements'; booting a patient once Medicaid kicks in
Can the kids block our cash flow?; childless couple agonizes over whether to use
powers of attorney or a living trust to manage our assets

Control your assets from the grave
Slacker son will blow his fortune; lawyer's role in "estate-planning"
Mom remarried and spent my inheritance; doesn't want daughter-in-law to receive anything from estate
Can we stop our brother from swindling us?
What Gifting Will Disqualify You From Medicaid
The 'magic' language for a power of attorney agreement
Is care insurance a healthy choice?
Is there protection against Medicaid costs?
Long-term care insurance comes up short
HIPAA -- too much privacy?; nursing home doc could care less
Private pay nursing home residents pay more
Separated families should use care managers
What Makes Up a Caregiving Team?
Who is the client, parents or children?:

© 2004, Jan Warner