To rollover or not to rollover?

[Chalco]

Hi Financial Wizards,

I have 100,000 in a tax-sheltered annuity and am 60 years old. It is in a fixed account earning 4%. Thus far, I haven't lost anything (whereas many of my friends have lost 60% in other types of accounts), however, my concern is that if the company goes under would I lose everything since the account isn't insured by the FDIC? They are a member of SPIC. The company is ING Retirement Plans.

Should I leave the money in or should I roll it over into an account that is insured by the FDIC and if so would I lose money/have to pay taxes? I don't want to pay taxes on it or lose any, obviously.

Any thoughts would be greatly appreciated.

[A HERETIC I AM]

1. You probably worked for the state, a Hospital or some other non-profit, right?

Then what you have is probably classified under IRS code 403(B). With a few differences, 403(B) plans can be rolled to an IRA just like 401(K) plans. One common restriction is a waiting period after you leave the job. There are others and they vary by plan provider so check with your plan provider for any rollover restrictions.

If there are no other restrictions or you are past any required waiting period, you can roll the funds into an IRA at any institution you like that offers custodial accounts, be it a Bank, Credit Union, On-Line Brokerage or brick and mortar, full service brokerage. Most full service brokerage firms can provide FDIC insured CD's and most certainly any Bank will also. Search any bank you can think of and you'll find most offer IRA accounts. Doing such a rollover is not a so-called "taxable event" because you never physically take control of the funds and it is moving from one "qualified" account to another. The only way you would encounter a taxable event is if you surrendered the annuity, received a check, deposited it into your own checking or savings account and left it there. If I'm not mistaken, the IRS gives you 60 days, after which you are considered to have taken control.

403(B) plans carry the same mandatory distributions rules that 401(K)'s and IRA's do, in that you must start taking distributions in the year after you turn 70 1/2 years old. You could start taking them now that you are 60 if you like, but as you are probably aware, distributions are typically subject to ordinary income tax.

Here is IRS publication 571 which discusses these plans completely. Carefully read section 8, "Distributions and Rollovers"

One thing to keep in mind about FDIC insurance; even though the premiums for this insurance are paid by the institution offering it, it isn't really free to you. You pay for it by receiving a lower yield on CD's for instance, than you would on a non-insured debt instrument of similar credit quality.

As far as ING going under and taking your money with them, it isn't really likely because companies that offer annuity products are required to keep these funds separate from their general accounts. It's essentially a life insurance contract. You will find, however that if you read the prospectus carefully, somewhere in there is language that stipulates something to the effect "All guarantees are dependent on the claims paying ability of the Insurer." The Securities Investor Protection Corporation (SIPC) covers investments held at member financial institutions but does in no way cover for market losses of those securities. Here's their page describing what they cover with a further link for more detail.

If you want the penultimate in safety of your assets, these days the only risk free investment is US Treasuries. In spite of what many other DU'rs might think, the United States Treasury is GOING to give you your money back when the note matures. Plus it is just about the most liquid market in the world so if you needed to liquidate, there is always a buyer. The problem these days is that yields absolutely suck.

Hope that helps.

Edited for - well, after 3 proof reads I still missed a letter!

[Chalco]

2. more...

Thanks, Heretic,


Regarding "somewhere in there is language that stipulates something to the effect "All guarantees are dependent on the claims paying ability of the Insurer." The Securities Investor Protection Corporation (SIPC) covers investments held at member financial institutions but does in no way cover for market losses of those securities." The fine print does say that, but what does it really mean? My funds are in the most conservative opions available. Last year, the earning % was 3%, this year it's 4%. If I put it in a CD at Bank of America I get 2%. Can I rollover into a CD at Bank of America without tax repurcussions? Should I rollover to an IRA (FDIC insured)? The problem with that is they seem to require a 5 year stay until you can withdraw--that seems too long to me given that my child will be going to college in 3 years.

Also, on the SIPC website it said "Among the investments that are ineligible for SIPC protection are commodity futures contracts and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933." Does that mean that my fixed TSA is ineligible for SIPC protection?

This is so complicated.

What I want is something that is secure, that I can withdraw money as needed, that I don't have to pay taxes on if I rollover. (I assume I would have to pay taxes if I withdraw money.)

[A HERETIC I AM]

3. Some answers..

Regarding "somewhere in there is language that stipulates something to the effect "All guarantees are dependent on the claims paying ability of the Insurer." The Securities Investor Protection Corporation (SIPC) covers investments held at member financial institutions but does in no way cover for market losses of those securities." The fine print does say that, but what does it really mean?

It means that if an investment firm with which you have an account and have bought investments through goes belly up, your investments will not disappear.

Example;
You open an IRA and a plain old investment account with Snarles Squab and Associates, Investments, a member of the SIPC. In the IRA you have a portfolio including $5,000 in cash, several individual stock positions, (100 shares of Boeing, 50 shares of 3M, etc.) individual Corporate Bonds, (10 of a 5% coupon Caterpillar Bond that matures in 2017, etc.) and say $20K worth of Franklin Templeton Mutual Funds. In the Regular account you hold a $50,000 laddered portfolio of various Municipal Bonds (5 of a 4% Cook County Illinois School District Bond maturing in 2025, 10 of a Sarasota County Florida Airport Improvement Bond maturing in 2021, etc) and $65,000 in cash. None of those positions are in any way issued by or managed by Snarles Squab and Associates. If Squab goes out of business (think Lehman Brothers) you will not lose your investments OR YOUR CASH. The SIPC is there to step in and see to it that all accounts and their assets are transferred to a selected firm, after which you and everyone else can open accounts at another firm of their choosing. They also cover cash deposits up to $100,000.
http://www.sipc.org/pdf/SIPC_English_2008.pdf (Page 2, under "How account transfers work".)

The thing is, the SIPC can in no way make you whole again if your shares of Boeing and MMM have fallen in value below what you paid for them or if the Sarasota Airport Bond goes into default OR if you bought shares of Squab and Associates. A decline in the value of your assets has nothing to do with the failure of the brokerage firm.

OK?

My funds are in the most conservative opions available. Last year, the earning % was 3%, this year it's 4%. If I put it in a CD at Bank of America I get 2%. Can I rollover into a CD at Bank of America without tax repurcussions?

Yes, absolutely. Bank of America, Wells Fargo, Wachovia and scores of others offer IRA accounts. You can open one and once the rollover is completed you can buy CD's till the cows come home with ZERO tax consequences. As I said in my previous post, rolling from your TSA to an IRA is not a taxable event. Keep in mind that some Banks may not offer a full range of investment choices, should you desire them. In many cases, the person you deal with in setting up an IRA at a bank may only have a Series 6 License and not a Series 7. A 6 holder can only sell Annuities, Mutual Funds and Insurance. A 7 holder can sell every security except Commodities and Futures. (That requires a Series 3) Be sure to ask if the person has a 6 or a 7.

Should I rollover to an IRA (FDIC insured)?

I blocked this short question separately as to make something very clear as I see this sort of reference in many posts on DU; IRA's are simply accounts. There is no such thing as a "FDIC Insured IRA". What IS FDIC insured are most Certificates of Deposit and (usually) cash deposits and as a general rule, these are the only insured instruments. If you open an IRA and purchase an insured CD inside it, then you've got insurance. You could also buy shares of a Mutual Fund and those would NOT be FDIC insured. The answer to the question is sure, why not? You can absolutely roll it to an IRA and inside that IRA you can purchase FDIC insured CD's.

Clear?

The problem with that is they seem to require a 5 year stay until you can withdraw--that seems too long to me given that my child will be going to college in 3 years.

Who is the "they"? Bank of America? Your TSA custodian? You're 60. In the year after you turn 59 1/2 you can begin withdrawing from an IRA without penalty. You just have to pay income taxes on the money you pull out. I don't understand the "5 year stay" reference unless it refers to the provisions of your 403 plan or perhaps you looked at the Bank of America website and misunderstood the information regarding a 5 year CD. Can you expand on this point?

Also, on the SIPC website it said "Among the investments that are ineligible for SIPC protection are commodity futures contracts and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933." Does that mean that my fixed TSA is ineligible for SIPC protection?

It depends. I'd have to actually see your TSA paperwork (the contract, prospectus, etc.) to be sure but if the provider, whoever it is, is not registered with the SEC under the terms of the 1933 act, then yes, it is ineligible for the coverage. Frankly, I would be very surprised if your provider is not registered under the terms of the act. Hedge Funds are not. Most major retirement plan custodians, to the best of my knowledge, are.

For the sake of illustration, let's assume your TSA is through TIAA-CREF. This page has a link to the "Individual 403(B) Custodial Agreement". If you open the PDF document you'll see that on the 2nd page it states the "Custodian" is JPMorgan Chase Bank N.A , with TIAA-CREF as "Record Keeper"
Even if TIAA-CREF is not registered with the SEC (I'm rather sure they are) JPMorgan most certainly is.

The real point though is that fixed annuities fall under a different set of regulations - they are essentially insurance policies, and therefore are (for lack of a better term) exempt from SIPC coverage. The methods they use to give you that 4% you mentioned you are receiving are regulated under a different set of rules than are Variable Annuities, for instance.

What I want is something that is secure, that I can withdraw money as needed, that I don't have to pay taxes on if I rollover. (I assume I would have to pay taxes if I withdraw money.)

Then a Rollover IRA is what you're looking for. You just have to make sure that you purchase CD's and you want to "ladder" them so that every month you have one mature. With the funds from the maturing CD, you can either buy another at the end of the ladder or take it as a distribution.

I hope that what I've written is of some help and if anyone else reads this and spots any inaccuracies, please point them out.

[Chalco]

4. Thanks!

Hi Heretic,

Your input has been very helpful. I also talked with Bank of America about their CDs and with the guy from ING that handles my TSA. The Bank of America CDs would be 2.25%. The guy at ING said that the TSA account that I'm in is extremely stable (of course, he doesn't want to lose me so I listened with caution). I asked why. He said that it was extremely conservative and was invested in government bonds and the like. I asked why the interest rate on it went up from 3% last year to 4% this year and he said that it's just a very old product and is doing well. He said my account was insured up to 500,000 and that even if ING went under I was covered.

So...I elected to stay in the account. Does this make sense?

Chalco

[A HERETIC I AM]

5. Sure it makes sense. ...maybe!

Fixed Annuities are indeed invested very conservatively. They have to be, and they use very well rated, typically long term debt securities (bonds) in order to ensure that kind of interest rate over the long term. But because of what is going on presently in the bond market, don't be surprised if they lower that rate again at some point in the future. I say that because as the bonds they hold that are giving them (and you) that 4% rate mature and are redeemed, they have to go to the bond market and replace them at current market rates. If yields stay low, they will have trouble maintaining that 4% going forward. The average yield of their bond portfolio is perhaps 5% or higher, they are just taking that 1% (or whatever) difference as fees. 18 months ago the yield on the 30 year Treasury was better than 4.5%. It is now 3.6%.

The reason I said "maybe" is because only YOU can determine if a 4% yield/return is going to be enough for you. Another thing that needs to be considered are the exact terms of your contract and whether or not they will fit your needs going forward. Annuities can be difficult to understand and there are literally dozens and dozens of different provisions, types, restrictions, benefits, etc.

For what it is, I would suggest the ING contract you have is perfectly fine. The question is whether or not you could get a better deal elsewhere. What they will (or are going to) guarantee you is a fixed amount of income for your life. Could you take your $100,000, move it to an IRA, buy a bond portfolio and do the same thing? Perhaps. It's just that your bond portfolio would not have a giant insurance company standing behind it.

One last thing;

The insurance the ING guy mentioned that is covering your money?

It's insurance from ING.

[Chalco]

6. Ok I'll take the bait...

"The insurance the ING guy mentioned that is covering your money?

It's insurance from ING."

Meaning what? Did he lie when he said if ING goes under I don't lose my money?

[A HERETIC I AM]

7. Meaning it isn't Federal.

That's all. It's not an obligation of the government.

He didn't lie, he just didn't tell you that part, did he?

[Chalco]

8. No, but I already knew that part.

Thanks for everything.

I was just on the Washington Post website this morning reading readers' reactions to Jon Stewart's takedown of Jim Cramer and a Dutch guy weighed in. Included in his comments was something about ING being a Dutch bank. I the ING in the U.S. tied to the same Dutch bank?

Here's part of his comment.

"I lost big money on this crisis, it would be fair if the american government pays off my losses. Just like our bank (ING) will guarantee the saving-money on all their accounts. The dutch citizens all are responsible for this bank in case it will fall down."

The whole comment is here <http://www.washingtonpost.com/wp-srv/community/groups/index.html?plckForumPage=ForumDiscussion&plckDiscussionId=Cat%3aa70e3396-6663-4a8d-ba19-e44939d3c44fForum%3a1d815998-efbb-465a-8a40-74441676780fDiscussion%3af4719957-acbe-4e32-8911-af0323ff80ea>

[A HERETIC I AM]

9. Same parent company, yes. "Internationale Nederlanden Groep"

http://en.wikipedia.org/wiki/ING_Group

http://www.ing.com/group/index.jsp

They have numerous business lines which include INGDirect (internet banking) ING Investment Services and ING Insurance, among others.

According to the Wiki entry, in 2008 they were the 9th largest corporation in the world.