Dave Says
Advice from Nashville's leading Financial Aid Advisor Dave Ramsey
Author of Financial Peace and The Total Money Makeover

Was I misled with my investment?

Dear Dave,
Two years ago I started a Roth IRA and was putting a little over $100 a month into it. Then last year I think I was kind of misled into getting into a tax shelter annuity, I don’t know if that’s the right term for it, where life insurance was covering my investment. Supposedly, when I’m 59 year old I can take all of the money back out tax-free. The guy who sold it to me made it all sound like a really good investment. He also talked me into ignoring my Roth IRA because this annuity investment was averaging 12% returns. Now, I’ve gotten my annual statement and the returns are terrible. There’s only about $600 in the account! Did I make a mistake?
Also, I just started a job that offers a 403(b) investment plan. Would this be a better investment? Would it be better than the Roth IRA?
Brent in Greenville, SC

Dear Brent,
Yes, you definitely were misled. Guess what, all of the money you paid into that annuity investment doesn’t go into savings.
Here’s an idea. Cancel that annuity account – which is, by the way, a variable life insurance policy. You’ve basically got a hole in your pocket and, in a case like that; you don’t keep shoving money into the pocket. You sew it up. The really bad news is that you’re going to lose all of your money. They keep everything you pay in for the first year to two years for fees and commissions. You may get a tad bit back out, but I doubt it.

When I do something stupid, Brent, and lose money because of it, I call that Stupid Tax. You’re about to pay some Stupid Tax. However, you’re not alone. Eighty percent of Americans have purchased cash-value life insurance and it’s a rip off. The good thing for you is you realized it early in the process. I’m glad you didn’t call me at 65 year old having just figured this out.

With regard to the 403(b) plan, I would invest in that if your employer offers matching funds. I suggest investing up to the amount they match. Over the amount they match, I’d invest in a Roth IRA. If they don’t match, you’re better off with the Roth IRA. Make sure you stay away from any investment that includes the word “annuity” unless you’ve maxed out all other available investment plans. And definitely stay away from any investment plan inside of life insurance.

One last thing, if you do need life insurance, make sure you get good term insurance in place before you cancel this other policy. You don’t want to be without any coverage at all.
-Dave
5/02/2005

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