Question: My wife and I have just over $400,000 total in our IRA’s, and have been investing in certificates of deposit called “laddered” CD’s with our local bank. Generally, one-fourth of our CD’s come due every year, and we roll them over with the interest. This past week, we received a call from a bank representative who told us that based on the dividend tax cut, my wife and I would be better off putting the $100,000 that is coming due into a variable annuity that is guaranteed not to lose money. In this way, he told us, we could get a higher interest rate than the CD’s would pay and grow our IRA’s faster.

My wife is 68 and I just turned 70. We were somewhat skeptical because it seemed to be too good to be true, so we decided to write you because we believe you are unbiased and will steer us straight. What would you do?

Answer: If we were you, we would find another banking relationship. It is indeed unfortunate that some banks feel the need to tell half-truths to their loyal customers – especially seniors – in the name of earning more fees.

First of all, the representation that you will benefit from the dividend tax cut if you purchase an annuity is a flat untruth, not unlike the representations made by proponents of the “dividend tax cut” that it will help middle-class Americans. Hogwash! Statistically, just over half of all Americans own any stock at all, and most of these folks have their stock holdings tied up in their 401(k) plans and IRA’s which, due to the deferral of taxable income, will not receive any benefit from the dividend tax cut.

Second, the purchase of a variable annuity inside an IRA results in no economic benefit of which we are aware. Your IRA is already tax deferred, so why should anyone in his or her right mind purchase a tax-deferred variable annuity inside a tax-deferred IRA? In truth -- of which you are receiving very little from your banker – the downsides can be significant because the expenses associated with the deferred annuity are greater than will ever be explained to you.

As a matter of fact, in our opinion, even the suggestion that you purchase a variable annuity inside your IRA indicates that the banker is looking out for his best interests -- not yours -- because of the commission to be earned. There is no economic justification to sell you this product, especially when you think about the fact that the annuity company is investing your money in the stock market, something that you clearly don’t want to do given your history of using certificates of deposit. And, by the way, the “guarantee against loss” that you are being told about really means that if your account loses money, your beneficiary will not lose money if the annuity is kept until you die. This is because part of the expenses you are unwittingly paying is a life insurance component.

Lastly, if you purchase the annuity, you will be told that there is no cost to you up front, but the rest of the story is generally not disclosed. Let’s say, for example, that you decide, after a year or two, to sell the annuity because it is not performing well. Your IRA will be hit with surrender charges, that is, a “back-end load” that can exceed 8%, depending on the terms of the particular contract. While these sales costs may be disclosed to you, they are not stressed, meaning that the annuity is not an appropriate option for folks who, for one reason or another, may need access to their investment through liquidation in the short term before the sales charges evaporate over time.

Taking the NextStep: While annuities may have their place, it’s not in IRA’s or other tax-deferred accounts. So make sure to read and understand the entire contract before you sign on the line.