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I am 29 years old and committed to maxing out my 401(k) as well as investing in a Roth IRA. My father and his friends have been following the advice of a financial planner for many years. He works for Thrivent for Lutherans. He recommended I put my Roth IRA in a variable annuity. The more I read I think that this may not be the best move. I have already opened the account and made contributions for over a year now. I will probably pay a penalty to move the money. What are your comments about variable annuities vs. mutual funds in a Roth IRA?

I have good news and bad. The good news is you are only 29 years old and you will recover from this horrendous piece of financial advice. The bad news is your inheritance will probably be much smaller than it could have been had your father learned about no-load funds when he was 29. I hope you will read "Four simple steps to better returns." The article is filled with many tables of returns based on a variety of decisions such as using load or no-load funds.

The recommendation of using a variable annuity to fund your Roth IRA is an outrage. The variable annuity will cost you at least 1.5 percent more than you have to pay and adds absolutely nothing to your long term return.

Here is the likely difference in what your money will grow to using the no-load vs. variable annuity investments. Of course I can't know what the future will bring but I think my assumptions are reasonable. Let's assume you invest $5,000 a year into your Roth IRA for the next 30 years, followed by taking out 6 percent a year for the following 30 years. I also assume the variable annuity will compound at 9 percent while the no-load fund will compound at 10.5 percent.

At the end of 30 years the variable annuity will be worth about $743,000 and the first annual distribution (6 percent) will be $44,600. Assuming you continue to take out 6 percent and the portfolio grows at 9 percent, at the end of the next 30 years (your age 89) the value left to your heirs will theoretically be $1.8 million.

Assume you select a no-load fund, (unburdened with unnecessary insurance costs, contract expenses, higher management fees and limited asset class selection), and it grows at 10.5 percent instead of 9. At the end of 30 years the Roth IRA will be worth $999,000 and the first annual distribution (6 percent) will be about $60,000. But as we continue the additional 1.5 percent growth advantage and the 6 percent withdrawal rate, at the end of the next 30 years the value left to your heirs may be as much as $3.7 million.

Remember, in each case you invested a total of $150,000.

Think of the return on investment if you spend 10 hours learning how to do this right. I suggest you purchase my latest DVD for $15 and give it to your dad for his birthday. The best time to plant a tree was 20 years ago. The second best time is now. It is never the right time to do the wrong thing.

IMPORTANT DISCLOSURE: The specific content of this message is intended strictly for informational and educational purposes. Such content is not based on knowledge of any reader's individual needs or circumstances and should not be construed as investment or tax advice. Any investment or tax decisions made are ultimately the responsibility of the individual.

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