$85,000 Investment Mistake? Suze Orman Says This Listener Should Exit Her Annuity ASAP

When listener Portia asked a question on the "Women & Money" podcast about her variable annuity, Suze Orman didn't hold back. Based on the high fees Portia was paying and the surrender schedule she faced, Orman advised her to cut her losses — and fast.

If you've ever wondered whether an annuity is right for your retirement funds, especially when it involves rolling over a 401(k), this is a story worth paying attention to.

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What Happened: A Costly Variable Annuity

Portia explained that she transferred $85,000 from her previous employer's 401(k) into a variable annuity at Fidelity in 2022. She's currently paying around $380 per quarter in fees — more than $1,500 per year — and the annuity has a nine-year surrender period. If she waits it out, she avoids the surrender charge but continues paying hefty fees. If she exits now, she'll face a penalty of roughly 7%.

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Orman did the math. If Portia sticks with the annuity until the ninth year, she'll end up paying approximately $9,120 in fees. In contrast, her surrender charge today would be around $6,300 to $6,900. “Absolutely surrender it," Orman said. "It makes no sense for you to be in it."

Why Orman Advises Getting Out Now

Orman has long warned against putting retirement savings into variable annuities, especially when they come from qualified accounts like a 401(k). In Portia's case, the high annual fees alone are reason enough to reconsider.

According to Investopedia, variable annuities often charge 2% to 3% annually just for management and administrative costs. Add in surrender charges, possible sales commissions, and insurance fees, and you're looking at a serious drain on your retirement savings over time.

Even though annuities offer the benefit of guaranteed income, that security comes at a price. "It makes no sense for you to be in it," Orman said. "You might even want to look at converting it little by little to a Roth IRA and really save money in the long run."

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The Risks of Rolling Over a 401(k) Into an Annuity

Rolling a 401(k) into an annuity can sound appealing — it promises stability and income in retirement. But the move can backfire if you're not fully informed.

Here's why:

• No added tax benefit: A 401(k) is already tax-deferred, so moving it into an annuity doesn't give you extra tax savings.
• Limited flexibility: Annuities often lock you into fixed payment schedules, which can be a problem if your expenses vary month to month.
• Hefty fees: Fees can quietly eat away at your balance, reducing your future payouts.
• Inheritance issues: If you die prematurely, the remaining annuity funds may go to the insurance company — not your heirs.

See Also: Can you guess how many retire with a $5,000,000 nest egg? The percentage may shock you.

What Portia — and Others — Can Do Instead

Orman suggested that Portia surrender the annuity and reinvest the money in her IRA in a way that makes more financial sense. She also floated the idea of gradually converting the funds to a Roth IRA to reduce future tax burdens.

If you're in a similar situation, consider seeking advice from a financial planner before making changes. Understanding your investment's fee structure, potential penalties, and tax implications is key to making the right decision.

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