What makes
an annuity a good investment?
For people who have contributed the maximum amount to IRAs and
employer plans, annuities can be a great way to defer current
income from taxes. You can contribute much more than the annual
amount allowed by an IRA. And, while the earnings or interest
are taxed at payout, the principal is not (because contributions
in a non-qualified annuity are made with after-tax dollars),
like traditional IRAs (qualified Roth distributions are income
tax free if certain requirements are met). Although IRAs already
have income-tax deferral, using annuities to fund your IRA can
provide guarantees of income and death benefits not available
in other IRA funding vehicles.
Payout options also vary, depending on the annuitization
option you select. Some annuities pay out for the life of
the annuitant (the person who holds the annuity), while others
pay out for a specified period of time. Immediate annuities
begin paying right away. It's often been said that annuities
are the opposite of life insurance - they may pay out when
you're living, while life insurance generally pays after you
die.
Your heirs can even continue to benefit from an annuity after
you are gone. This can happen two ways: If you started receiving
annuity payments before you die, some annuities will continue
paying the proceeds to your beneficiary or a joint annuitant
depending on the annuitization option you elected. If you
die before the annuity begins to pay out, your beneficiary
usually receives a stated death benefit, such as the value
of the annuity (the premiums you've paid plus any gains).
In some cases enhanced death benefits may be available. Additionally,
annuities are not subject to probate if you named a beneficiary
other than the estate.
Bank certificates of deposit (CDs) offer a fixed interest
rate for a specified period of time, are FDIC insured, and
the interest earned is 100 percent taxable in the year it
is earned. Annuities, however, allow your money the potential
to grow income tax-deferred and any earnings are taxed when
distributed, when you may be in a lower income tax bracket.
For the record, different types of annuities also have different
levels of risk, with fixed annuities being less risky than
variable annuities.
On the other hand
While the benefits of purchasing an annuity can be very high,
you should consider a couple of things first. Annuities are
not insured by the FDIC as bank CDs are, meaning the government
does not insure your money. With that said, you should therefore
choose a stable insurance company when making this kind of
decision.
Cost is a second consideration when purchasing an annuity.
Like IRAs, annuities have early-withdrawal penalties and fees.
Generally, there's a 10 percent early-withdrawal penalty if
you want to take withdrawals of your earnings before age 59
1/2. Also, some insurance companies assess a charge (called
a surrender charge) if you withdraw your money before a specified
time. Be sure to ask us about surrender charges and annual
administrative or other fees. You may not have to worry about
these expenses, but it's better to know before you buy.
All things considered, there are great benefits in annuities,
especially if you are able to wait for retirement to receive
your payout. If you think an annuity may be right for you,
contact us at 1-800-803-0224. an annuity may be right for
you, contact us at 1-800-803-0224.
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