IRA with a fixed floor
I have recently been told by a friend they converted their IRA (it is in a trust) to one that has a fixed floor – no matter what the market does, it will go do lower than when it was converted. It will continue to earn interest, but at a lower rate. Is this a provision that is particular to trusts? I would like more information on it – is it a type of annuity, or what? I’m leery about changing mine.
Permalink Submitted by Alan Spross on Sat, 2007-09-29 19:23
This has nothing directly to do with trusts as IRA beneficiaries.
The investment is an equity indexed annuity, the current “hot product” sold to risk averse seniors, either in their IRA or taxable account. EIAs are also a favored product of the infamous free lunch or dinner seminars being hosted around the nation.
The EIA trades upside stock market potential for downside protection through use of options and other hedging techniques. When you back test these products in various market cycles, you typically find out that the gains are rarely likely to exceed what a fixed annuity would pay unless there is long term multi year bull market like the late 90s. Those are very rare. Beyond that, the usual annuity fringe features can be included as is typical with a regular VA, and of course with large commisions in most cases and surrender charges. This is a product that inherently sounds like a no lose decision, until all the component parts and costs are thorougly analyzed. Few investors can mentally get through that entire analysis. Just do some research on equity indexed annuities. If you buy one, you are pretty well locked in for close to a decade.
Permalink Submitted by Bruce Steiner on Sun, 2007-09-30 03:31
Whenever you go to the free lunch, if you’re the one who buys the annuity or the living trust or the time share or the bridge, not only did you pay for your free lunch, but you paid for the free lunches for everyone else in the room.