Suze Orman: This Money Move ‘Makes Absolutely No Sense Whatsoever’
Written by
Yaël Bizouati-Kennedy
Edited by
Maria Concepcion
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Personal finance expert and New York Times bestselling author Suze Orman recently said in her “Women & Money” podcast that you should not put an annuity within an IRA, as it would make “absolutely no sense whatsoever.”
“Why in the world would you put an annuity within an IRA?” Orman said during her May 16 podcast. “That is the question at hand and there is only one answer to that question – is you would never ever do so – in 99% of the circumstances, you have an IRA, whether it’s a Roth Ira or a traditional IRA or what’s called a regular IRA, that is known as a tax-sheltered vehicle.”
Orman further argued that what you own in that retirement account doesn’t also need to be tax-sheltered because you’re already in a tax-sheltered vehicle.
Indeed, as the Internal Revenue Service (IRS) explained, a traditional IRA enables you to save for retirement and offers tax advantages – contributions you make to a traditional IRA may be fully or partially deductible, depending on your filing status and income.
As for annuities, they are contracts between you and an insurance company that require the insurer to make payments to you, either immediately or in the future. And as Investor.gov explained, taxes are deferred on earnings growth. Yet, it’s important to note that when there are withdrawals, gains are taxed at ordinary income rates, and not capital gains rates, Investor.gov further noted.
“So, you have purchased a tax-sheltered investment within a tax-sheltered vehicle,” she said. “That makes absolutely no sense whatsoever. Especially since an annuity normally comes with what’s known as surrender charges.”
Surrender charges are fees you have to pay if you sell or withdraw money from a variable annuity during the so-called “surrender period” – generally six to eight years following the purchase of the annuity, according to Investor.gov.
In other words, as The Motley Fool puts it, surrender charges are fees you pay to end an insurance or annuity product early.
And as Orman pointed out – the surrender charges “kind of have you trapped.”
“They entice you by giving you a high interest rate to come into this annuity,” she said. “You’ll make 5% a year, whatever it may be, maybe then the year is up, they lower your interest rate, which is what they did here to 0.50%,” she said, answering a listener’s emailed question.
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