How to Insure Your IRA

If insuring your retirement account against your premature death is important to you, consider purchasing an annuity contract within your IRA.

Difficulty: Moderate

Instructions

Things You'll Need:

• Guide To Personal Finance
• IRS Forms
• Investment Advice
• Plan-idea Books
• Accountants
• Accounting Services
• Financial Manager
• Insurance
• Tax Consultants
• Tax Services
• TaxCut
• TurboTax
• Investment Software
• Personal Financial Software
• Tax Preparation Software

1. Decide whether you can tolerate market risk with the money in your IRA; if you can, consider a variable annuity, and if not, consider a fixed annuity.

2. Research available annuity contracts in consultation with a trusted broker or a life insurance agent or by accessing an online advisory service.

3. Narrow your search to annuities underwritten by financially strong insurance companies.

4. If variable annuities are your choice, narrow your search to those that offer mutual funds with investment objectives compatible with your risk tolerance.

5. Review the features, limitations and flexibility of the annuities and carefully consider any riders that you may want to include, such as living benefits or spousal continuation options.

6. Compare the costs associated with the life insurance component of the annuities - the mortality and expense, or "m&e," charges.

7. Include in your cost considerations the management fees of mutual funds if you are looking at variable annuities.

8. Review the income and estate tax consequences of an annuity contract in IRA accounts with a trusted tax advisor, or access the appropriate IRS online sites.

9. Choose the annuity that is best for you and your retirement planning goals, and complete the necessary transfer paperwork and annuity application with your financial advisor or insurance agent.

Tips & Warnings

• An annuity contract guarantees that your spouse or designated beneficiary will receive at least the sum of all of the contributions you make to the contract within your IRA if you die before using it.
• Many annuity contracts offer an annual "step-up" of the death benefit, regardless of the interest or returns of the investments in the contract, providing additional insurance on you for your survivor(s).
• On average, the cost of investing in mutual funds within an annuity is less than 1 percent more than investing in mutual funds outside of an annuity.
• With your IRA money in a variable annuity, you can invest in the market knowing that your spouse or heirs are protected against downward movement in the market should you die during that period.
• A fixed annuity often provides higher interest rates than money market or savings account interest.
• An equity-indexed annuity is a relatively new type of contract that provides upside market potential with guarantees against downside risk.
• Don't be pressured into buying an annuity within an IRA if you don't want or need life insurance for the IRA account value. The life insurance component of an annuity costs approximately 1.35 percent of the account value, and those costs will be deducted whether or not there are any gains.
• There are no limits to the amount of money you can deposit into an annuity contract, but your allowable contributions to an annuity in an IRA are limited by the tax code.
• Don't pay for annuity features or riders that would trigger a tax event to you if exercised or that would be negated altogether because the contract is in an IRA.
• Before you buy an annuity within an IRA, check with your tax advisor regarding the tax consequences of such things as early withdrawal and taking distributions during retirement

on 11/22/2005 Beware, a variable annuity can tie up your funds for 7 years. Get expert independent opinions from a financial adviser who is NOT going to sell you an annuity. Most people are better off with an IRA/401/457 as opposed to an annuity.