Breaking a retirement contract early rarely works in the client’s favor, but one family almost learned that lesson the hard way. The surrender charge was only the beginning of what this transfer would have cost.
A Boston listener brought this exact scenario to Suze Orman, personal finance author and host of the “Women & Money” podcast.
The family wanted to surrender the mother’s $87,000 annuity and absorb the fee, then roll the balance into a Roth individual retirement account (IRA).
Orman dismantled the proposal in a response that reflects concerns shared by many families. The exchange highlights trade-offs retirees commonly weigh when an annuity contract approaches its surrender-period end date.
Orman calls the $6,000 surrender charge two years of wasted income
The mother’s guaranteed annuity pays $250 a month in required minimum distribution (RMD) income, or $3,000 a year, and the $6,000 charge equals roughly 24 months of that income.
For the move to break even, the roughly $80,000 in a Roth would need to produce more than the fee in after-tax value. A 78-year-old in a low tax bracket gets almost none of the Roth’s core advantage, because tax-free compounding requires decades to pay off.
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The tax hit on the converted amount would also count as ordinary income this year, compounding the penalty with a separate tax bill. That combination produces a net loss before the Roth generates a single dollar of growth.
Schwab’s published guidance recommends that families facing a similar decision should calculate how much room remains in their current tax bracket before converting any amount.
The contract expires in 2028, meaning the family can access the full balance without a fee by waiting out the final two years. That timeline eliminates the only scenario where paying the penalty could be justified.
Orman warns the annuity transfer could also threaten the mother’s housing
Orman told the listener that the entire proposal fails the most basic cost-benefit test. She warned that the family had not considered how a Roth IRA conversion later in life could create a separate problem with the mother’s housing.
Orman told the listener that breaking the contract early strips away the benefit the annuity is still delivering, and that the math behind the proposed transfer produces a loss no matter how the family runs it.
<strong>There’s no reason to surrender this annuity and take a $6,000 hit, that’s essentially two years of your mother’s income. Why would you do that? That makes absolutely no sense</strong>.
The break-even math alone makes the transfer hard to justify, but the mother’s housing situation makes it worse. Federal housing subsidies for elderly tenants tie rent to a percentage of countable income, according to Congressional Research Service Report R42734 on HUD rental assistance.
Reporting roughly $80,000 as income in a single year could spike the figure HUD uses to set the mother’s rent. Orman noted that while monthly withdrawals blend into the housing calculation, a lump-sum transfer would “screw everything up.”
The adviser commission Orman flagged behind the annuity transfer
Orman identified a financial incentive that may explain why the family received this recommendation in the first place. The roughly $80,000 remaining after the charge could generate a commission for whoever moves that money into a new product, she warned.
On the Sept. 3 episode of the “Women & Money” podcast, Orman told listeners they “cannot just take a financial adviser’s word for anything” and urged families to run their own numbers before acting on any proposed transfer.
The move produces no financial benefit for the mother, but it does produce a payday for the person who recommended it. That misalignment is what Orman told the listener to examine before agreeing to any transfer.
Orman urged families to ask any adviser how they are compensated on a proposed transaction, saying that this single question can expose whether the recommendation serves the client or the annuity’s commission structure.
What Orman tells annuity holders to check before accepting any transfer
Orman advised listeners to pull the annuity contract and review the surrender schedule before considering any adviser’s proposal to transfer, she said on the podcast.
Knowing exactly how much the fee is now and when it expires gives the family a straightforward way to test whether the adviser’s recommendation holds up.
When that date is close, the contract itself becomes the strongest argument for staying put, because every cost the transfer introduces disappears the moment the annuity runs off on its own, Orman said.
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