Why would your prospects who bought variable annuities (VAs) 10 years ago need swim goggles? So they can see their account values that are “under water.” The S&P 500 market index (not including dividends) is still down more than 15 percent since its high back in March of 2000. Adding to those market losses are annual management fees and insurance charges that, back in the day on those old school VAs, could be as high as 3 percent. Many early baby boomers retired at age 62 back then, rolled over their 401k and 403b retirement plans into IRAs and variable annuities and then wham! Your typical VA investor who bought at the market top in 2000 is still licking their wounds.

And according to DALBAR Studies, investors “actual” average return lags investment return consistently (see http://www.jmichaeladvisors.com/Why-People-Lose-Money.7.htm for more information) and thus it is likely that a typical variable annuity contract that is at least 10 years old has incurred significant losses. But you can be the hero and repair those old VAs that are now in qualified or IRA contracts.

Most of the VA contracts were written with a death benefit that would pay back 100 percent of the original investment less any withdrawals on a “dollar for dollar” basis. Using a hypothetical scenario, consider this: Mr. Smith invested his IRA or IRA rollover of say $100,000 into a VA in 1999 and today let’s assume the accumulation or market value is just $50,000 (ouch, but sadly not an atypical example). A repair solution is to transfer $49,000 into another IRA, leaving just $1,000 behind in original IRA variable annuity contract. Then convert the remaining $1,000 IRA VA into a Roth IRA. Taxes will be due only on the market value (which is $1,000) but the trick here is that the death benefit paid in the future of $51,000 will also be converted into a Roth IRA.

Ultimately, the current market loss will be recovered upon the death of the annuitant and that death benefit likely will be 100 percent tax free. Thus, Mr. Smith invested $100,000, withdrew $49,000 and regardless of the stock market or the price of tea in China, upon his death Mrs. Smith will receive at least $51,000 probably totally income tax free. And in the meantime, the $49,000 that was withdrawn and transferred into another IRA has had the opportunity to be invested into modern, better, more suitable vehicles. Caveat: Since this is a super cool trick to repair underwater qualified variable annuities, most insurance carriers changed the death benefit feature after 2001 to a proportional value instead of a dollar for dollar benefit. The result was that this awesome repair strategy won’t work on “newer” VA contracts that do not have a dollar for dollar withdrawal feature. 

Obviously, I am not a CPA and do not nor wish to offer any income tax advice or tax related strategy. Please consult your own tax advisor. Now live long and prosper.

Past performance is not indicative of future results. Neither LifeHealthPro nor Michael Ham guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed on this website. Before acting on information on this website, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.