Q: I am 83 and I have an insurance annuity. I would like to take it out and put it into an IRA CD at a bank. How do I go about doing this?
A: There are three sets of issues raised by this situation:
- Tax issues. Your situation is complicated by the fact that you are over age 70 1/2. IRS regulations stipulate that you have to be below age 70 1/2 and have wage compensation in order to start an IRA. You should probably consult an accountant to make sure there are no adverse tax consequences to accessing the value of the annuity at this time, especially if the option of an IRA is not open to you. However, just because you cannot open an IRA does not mean a CD is not an option for you if you are looking for guaranteed income.
- Contractual issues. Your annuity contract should include the logistical details of who to contact about terminating the annuity. Before you do that though, you should also look through the contract to make sure the are no penalties for terminating the annuity at this time. The more recently you purchased the annuity, the more likely there are to be such penalties. Also, you should see what the insurance component of the contract entails, because this is a component of an annuity that will not be replicated by a CD. As for the CD, if you decide to open one, you should consider first what your probable liquidity needs are, because this will help you decide how long a CD term to choose. Typically, you will find the best CD rates in longer term CDs, but you may not want to commit for that long. Another important consideration is the penalty for early withdrawal -- the smaller the penalty, the more flexibility you will have if your liquidity needs change.
- Interest rate issues. If you determine that it makes sense in other respects to terminate the annuity in favor of the CD, the next step is to shop for the best CD rates. Not only do you have to compare banks to find the best rate, but you should make sure you can find a CD that offers a rate advantage over your current annuity.
The order in which these issues appear above is probably the best order in which to address them. In other words, you want to start by avoiding any adverse tax ramifications, and then avoid any potential contractual problems. Only when you know you are free of these two issues does the decision essentially come down to comparing interest rates.
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