{"id":345759,"date":"2025-12-15T19:07:09","date_gmt":"2025-12-15T19:07:09","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/about-that-free-steak-dinner\/"},"modified":"2025-12-15T19:07:09","modified_gmt":"2025-12-15T19:07:09","slug":"about-that-free-steak-dinner","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=345759","title":{"rendered":"About That “Free” Steak Dinner…"},"content":{"rendered":"


\n<\/p>\n

\n
\n
\n

Before the article, check out the latest on my podcast, <\/em>Personal Finance for Long-Term Investors<\/em><\/strong>:<\/em><\/p>\n

\n
\"\"<\/a><\/figure>\n<\/div>\n

Now, here\u2019s today\u2019s article: <\/p>\n

\n<\/div>\n<\/div>\n

\u201cC\u201d wrote in this week:\u00a0<\/p>\n

\n

A friend (in Sweden of all places!) recommended you and I have become a fan \ud83d\ude09<\/p>\n

The short version of the story is that I went to a lovely free dinner sponsored by a financial investment company who would like to take my traditional IRA and convert it to Roth via a Fixed Indexed Annuity.<\/p>\n

They would pay a 17% bonus for my ~$580k traditional IRA + SEP + 401k and then, over the course of 10 years, convert to Roth<\/a>, keeping income down enough to not stimulate IRMAA<\/a> increase (when that becomes a concern at 63 \u2014 I am currently 60)<\/p>\n

As I understand it, my only risk is the opportunity cost of not maximizing market gains.<\/p>\n

Thanks for any insights you are willing\/able to provide!<\/p>\n<\/blockquote>\n

C, hello! Reading what you\u2019ve outlined,\u00a0my radar detector is rapidly whirring to life, and I\u2019m getting ready to sound a loud, red alert!\u00a0<\/p>\n

\n
\"\"<\/figure>\n<\/div>\n

First, let\u2019s define this lackluster tool \u2013 what is a fixed indexed annuity<\/strong>?\u00a0<\/p>\n

What is a Fixed Indexed Annuity (FIA)?<\/h2>\n

A\u00a0Fixed Indexed Annuity (FIA)\u00a0is an insurance product that promises two things:<\/p>\n

    \n
  1. Principal protection \u2013 your initial investment can\u2019t lose value due to market declines.<\/li>\n
  2. Some upside potential \u2013 returns are tied to a market index (like the S&P 500), but only partially.<\/li>\n<\/ol>\n

    Here\u2019s how it typically works:<\/p>\n

      \n
    1. The insurance company takes your premium and invests it conservatively (mostly in bonds).<\/li>\n
    2. They then use some of the interest earned to buy options on a market index.<\/li>\n
    3. If the index goes up, you get a\u00a0portion\u00a0of the gain (through a cap or participation rate).<\/li>\n
    4. If the index goes down, you earn zero. But don\u2019t lose money, either.<\/li>\n<\/ol>\n

      It sounds nice. No downside, some upside. But I think there are WAY more reasons to dislike FIAs.\u00a0<\/p>\n

      \n
      \"\"
      A cartoon from a FIA sales book<\/figcaption><\/figure>\n<\/div>\n

      1.\u00a0High, opaque costs<\/h4>\n

      The commissions paid to salespeople are often\u00a06 \u2013 10% upfront, hidden from the investor. Those costs are baked into the product\u2019s internal mechanics, resulting in lower crediting rates and slower growth for the client.<\/p>\n

      For this FIA that \u201cC\u201d is considering, the $580,000 in principal would result in a $30,000 \u2013 $60,000 commission to the salesperson. That alone should give us pause. <\/p>\n

      \n
      \"\"<\/figure>\n<\/div>\n

      2.\u00a0Complexity and confusion<\/h4>\n

      The jargon behind annuities is complicated: cap rates, participation rates, spreads, reset periods, and surrender charges.\u00a0<\/p>\n

      \n
      \"\"<\/figure>\n<\/div>\n

      The numbers and the way those numbers\u2019 interact\u2026it\u2019s usually more<\/em> complicated than the jargon! Every annuity uses its own verbiage in unique ways, combining confusing semantics with actuarial math. <\/p>\n

      It\u2019s nearly impossible for a layperson to fully understand what they\u2019re getting. Complexity hides fees and limits.<\/p>\n

      I\u2019ve had to work with people looking to \u201cunwind\u201d these annuities. I detest how complex they are. <\/p>\n

      3.\u00a0Limited upside<\/h4>\n

      The fact that a FIA is \u201cmarket-linked\u201d is a misleading promise. <\/p>\n

      If the market grows 15% and your FIA has a 6% cap, you only see that 6%. <\/p>\n

      They are sold as \u201cmarket-linked\u201d to make you think you\u2019re getting a real shake at market growth. But over time, these products lag market growth by a significant margin. <\/p>\n

      4.\u00a0Liquidity traps<\/h4>\n

      Most FIAs lock your money up for\u00a07 to 10 years. If you want out early, you face heavy surrender penalties. This inflexibility runs counter to sound, investor-centered financial planning.<\/p>\n

      \n
      \"\"<\/figure>\n<\/div>\n

      5.\u00a0Misaligned incentives<\/h4>\n

      Annuities are often sold, not bought nor advised. <\/p>\n

      Because of the big commissions, many non-fiduciary salespeople pitch them aggressively to retirees seeking safety, sometimes overstating returns or understating the downsides.<\/p>\n

      \n

      Do You Want To Learn More?<\/em><\/h3>\n

      If you\u2019re looking for better answers to your money questions, <\/em><\/p>\n

      My free weekly newsletter helps busy professionals and retirees avoid costly mistakes and grow lasting wealth to and through retirement. <\/em><\/p>\n

      Join 4000+ subscribers, 100% free. <\/em><\/p>\n

      Sign up here: <\/em><\/p>\n

      \n

      What About \u201cAnnuity + Roth Conversion?\u201d<\/h2>\n

      So, looking at \u201cC\u2019s\u201d FIA offer in particular, and the idea of using it as a vehicle for a Roth conversion<\/a>\u2026.<\/p>\n

      I\u2019m reaching my boiling point over here\u2026<\/em><\/p>\n

      \n
      \"\"<\/figure>\n<\/div>\n

      Point 1: The \u201cbonus\u201d isn\u2019t free money.<\/h4>\n

      \u201cC\u201d was promised a 17% bonus. It sounds amazing. It\u2019s the headline they use to hook people. <\/p>\n

      A real 17% bonus would result in actual money in your account. <\/p>\n

      But this bonus is not cash in your account. It\u2019s a\u00a0contract value\u00a0credit that only applies to income calculations after the 10-year holding period, not to the actual account you can walk away with. <\/p>\n

      \n
      \"\"<\/figure>\n<\/div>\n

      The \u201c17% bonus\u201d is offset by:<\/p>\n