Investments within IRA

[jklcpa]

Someone in another topic suggested this for a good strategy specifically within an IRA.  Most here aren't investment advisors and are precluded from giving investment advice to our clients beyond possibly helping them determine their risk tolerance or, for example explaining how different types of investments work, but this may be an interesting discussion of these types of investments, especially having this within IRAs and other retirement accounts.
 

Quote

In another topic, new member Donald Hughes said this: "We use EIA's - Equity Indexed Annuity's, Great Return, No Loss regardless of market activity, Lifetime Income available that you cannot outlive with Beneficiary benefits. Since 1974, no client has lost money due to the market adjustments. Safe!!"

 

Edited October 21, 2024 by jklcpa
credit quote to member who said it

[mcb39]

I just recently advised my son, who has a longtime redundant IRA set up years ago at the Credit Union; to invest it in a short term CD.  The Credit Union agreed.  He did as advised. He has been getting 0.99% interest and will now get 4.99% and after 7 months , we will re-evaluate.

[jklcpa]

My initial knee-jerk reaction to the idea of the annuity is why have a tax deferred annuity within a tax deferred account? There's also the potential to lose out on potential growth in years where the market is doing well, and possibly higher exit fees for early withdraw. I would agree with mcb for now that buying a CD isn't a bad idea, especially since many banks are offering the highest rates on the shorter term CDs, so the investor isn't locked in for very long at all. 

[BulldogTom]

10 minutes ago, jklcpa said:

My initial knee-jerk reaction to the idea of the annuity is why have a tax deferred annuity within a tax deferred account? 

My knee went to the same school as your knee.   Portfolio accounts are different than retirement accounts.   I have no issues with annuities as long as they fit the clients situation, but I feel they should stay in the portfolio and out of the IRAs.

Tom
Longview, TX

[mcb39]

You have to look at all sides of the situation.  My son now has a retirement plan  at work.  He doesn't need this money at the moment.  This IRA was set up in excess of 20 years ago.  It's just been sitting there slowly accumulating low interest.  Just saying.  I certainly wouldn't give this same advice to everyone.

[jklcpa]

1 minute ago, mcb39 said:

You have to look at all sides of the situation.  My son now has a retirement plan  at work.  He doesn't need this money at the moment.  This IRA was set up in excess of 20 years ago.  It's just been sitting there slowly accumulating low interest.  Just saying.  I certainly wouldn't give this same advice to everyone.

Exactly this.  All of the factors that go into choosing appropriate investments should be considered. Look at the entire portfolio and its diversity, retirement and non-retirement accounts, risk tolerance, current age, current and future savings rate, expected retirement age, expected lifestyle, health concerns, longevity.  I'm sure I've missed more than a few factors, and that is why I don't give any investment advice.   

[mcbreck]

An equity indexed annuity is a branch of the fixed side of annuities versus the variable side. It's not so much for growth, it's a product for safety with a "touch" of growth. I have no clue the commission rate on these as I haven't sold an annuity since 1991 but variable annuities are the highest commission product a financial advisor can sell you. MANY financial advisors literally make 90% of their sales via annuities for this reason.

When I took my series 6 exam (1991) and was licensed to sell annuities (life insurance also) my manager said NEVER put an annuity in an IRA. I took a class to pass my series 7 licensing exam (1992) and the instructor told us that you should NEVER sell a client an annuity and put it into an IRA. By about 1994 the insurance industry had spent a boatload of money and it was deemed reasonable to have an annuity within an IRA. The argument was that the life insurance component and lifetime payment made it worthwhile to be inside of an annuity even though the tax deferred portion was meaningless. You might argue the life insurance is tax free also but you are supposed to ignore that.

 

 

[BrewOne]

Definitely tricky staying within bounds when giving investment advice, I usually stick to making them aware they cannot take losses in an IRA and when you have mutual funds in IRA's, you don't have to track basis, so that's a good place for them.  But a lawyer talking to our local EA group brought up a different angle from the perspective of assets and legal protection.  In Florida, annuities, pensions (think OJ Simpson), and IRA's are "sheltered" accounts.  To him, if you want to buy an annuity, don't use IRA funds but use money from an unprotected brokerage account.

[kathyc2]

2 hours ago, jklcpa said:

In another topic, new member Donald Hughes said this: "Since 1974, no client has lost money due to the market adjustments. Safe!!"

Since 1974 there has never been a 20 year period in which the S&P lost money.  Since 1974 the only 10 year period with loss was from 1999 to 2008 - 1%, and 2000-2009 -.61%

 

Edited October 21, 2024 by jklcpa
credit quote to member who said it

[kathyc2]

1 hour ago, mcbreck said:

variable annuities are the highest commission product a financial advisor can sell you

Exactly!  

You have very little flexibility without paying huge penalties if you change your mind about wanting money in them.  Which leads to annoying commercials about companies that buy them out. 

If someone wants to pay ordinary tax rates on the earnings, they would be better off to buy 30 year Treasuries and pay tax on the interest when they cash them in. 

[mcbreck]

There were 2 stretches where Dow Jones Industrial Average didn't really do much at all for about 15 years each. The first was the great depression and the second was from the late 1960s until the early 1980's? The S&P 500 went up 6% from 1961 to 1974. That's not 6% per year, that's 6% total.

Multpl.com has some good charts showing how the current market is historically VERY expensive.

 

[kathyc2]

14 minutes ago, mcbreck said:

There were 2 stretches where Dow Jones Industrial Average didn't really do much at all for about 15 years each. The first was the great depression and the second was from the late 1960s until the early 1980's? The S&P 500 went up 6% from 1961 to 1974. That's not 6% per year, that's 6% total.

A lot has changed since those years.  IRA's and 401K's started in the 70's.  Mutual funds didn't really become popular until the 80's.  Have you seen anything as to how much the increase is due to more people buying in (supply/demand) as opposed to actual company earnings?  I'm guessing it's between 50-75% due to more people buying shares. 

[mcbreck]

24 minutes ago, kathyc2 said:

A lot has changed since those years.  IRA's and 401K's started in the 70's.  Mutual funds didn't really become popular until the 80's.  Have you seen anything as to how much the increase is due to more people buying in (supply/demand) as opposed to actual company earnings?  I'm guessing it's between 50-75% due to more people buying shares. 

People had pensions back then and those invested in the stock market also. In surveys, people with pensions don't think they own stock but they do indirectly. 

There are tons of factors for why the market moves including an increase in leverage, fed moving money into the economy, interest rates, participation rate (as you mention), savings rate and asset allocation.

The earnings yield on the S&P500 is 3.35% and that is historically VERY low. That's an inversion of the PE ratio so you can compare it to bond yields. The 10 year risk free bond is 4.08% so that yield of the market needs to come up.

 

[jiji778]

One thing that cannot be overemphasized during IRA investment is the overall impact of each choice. As we’ve seen EIA can offer safety and some level of growth to those investing but this comes with fees attached as well as the missed opportunities in the event of a hot market. In my mind, high-yield CDs are the best decision at the moment as they provide higher rates; still, they do not chain too much of your money. It’s just got to figure out what works optimal with your entire scheme of things!

[mcb39]

I have never liked annuities for personal reasons.  I like the stock market even less.  I, personally, have been laddering CDs for a few years now and am amazed at the interest I am amassing.  Bottom line is that my original investment will always be there.  This isn't necessarily the answer for everyone.  My first caution is to keep a safe cushion that is available for use should any unexpected event occur.  My  son is of the age where he could draw from his IRA or Pension at any time without penalty.  He also has a safe cushion.  I couldn't have given him any better advice at this time,  As Judy said, look at all the angles.  Examine the ins and outs and goals.  If in doubt, you should not be giving financial advice.

[TexTaxToo]

In general, I agree that annuities don't belong in IRAs.  But there may be exceptions.  SECURE 2.0 expanded the QLAC provision to allow you to use up to $200,000 of an IRA to purchase a QLAC, and the RMDs on that are eliminated.  That may be a reasonable tax strategy for someone whose RMDs force them into a higher bracket.  But as has been said, it requires looking at the entire financial picture of the individual.

[mcbreck]

We could also have a thread on whether moving from a trad to a roth ira makes sense and to who it makes sense. I've run the numbers a bunch of times and I just never see a significant advantage. I know some financial advisors push it because it produces activity but us 99%ers will need our IRAs to afford to retire so avoiding the RMD isn't really all that important.  

 

 

[jklcpa]

2 minutes ago, mcbreck said:

We could also have a thread on whether moving from a trad to a roth ira makes sense and to who it makes sense. I've run the numbers a bunch of times and I just never see a significant advantage. I know some financial advisors push it because it produces activity but us 99%ers will need our IRAs to afford to retire so avoiding the RMD isn't really all that important.  

 

 

Why don't you start the topic? This one got a lot of traction.

[mcbreck]

41 minutes ago, jklcpa said:

Why don't you start the topic? This one got a lot of traction.

I'm leaving today for vacation! New Zealand.

[jklcpa]

1 hour ago, mcbreck said:

I'm leaving today for vacation! New Zealand.

When you get back then. Enjoy your vacation!

[mcb39]

4 hours ago, jklcpa said:

Why don't you start the topic? This one got a lot of traction.

This could be a very good idea.  I have a few choice words on this subject.  (Makes me hot under the collar just thinking about it.)