Be wary of variable annuities

DEAR BRUCE: What are your thoughts on a broker recommending that I put my IRA into a variable annuity? What are the costs? How does the broker make money on this? — B.C., via email

DEAR B.C.: I don't have wild enthusiasm for variable annuities; however, there are times when they are appropriate. The first major variable is your age.

For a younger person, some variable annuities are advantageous, but if you are collecting Social Security and your money is already in a tax-deferred environment, where you can move funds from one investment to another without a penalty, why choose an annuity? Further, most annuities have a period when there are heavy penalties for early withdrawals, as there may very well be if you are an older person.

As to the cost, they vary considerably, but they are substantial. Of course, the broker makes a commission on these transactions. I would have no fear of sitting down and talking to a couple of these brokers.

Understand that, while they call themselves financial planners, if all they're selling are variable annuities, I would call them insurance salesmen. Nothing wrong with that, but it is the correct way to think of them. I would never say "no" outright, but before I moved, I would get several opinions, as new products hit the market regularly.

Send your questions to: Smart Money, P.O. Box 7150, Hudson, FL 34674. Email to: Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.)

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