Is an Annuity a Good Choice for You?
First, what is an Annuity?
An annuity is an agreement between you and an insurance company in which you give a one-time payment or a series of payments in exchange for receiving regular payments, either now or in the future. Variable, fixed index, and fixed-rate annuities are the three main forms of annuities.
The index has a patented crediting technique that is related to an index, the variable allows for stock market investing, and the fixed-rate has a defined rate of interest. The fixed rate and index are both insured against loss of principal, but the variable, like any other investment, carries a degree of downside risk.
In exchange for a fee, the index and variable annuities give a guarantee of income in retirement for the annuity holder.
In most cases, an annuity should only be considered after other tax-advantaged retirement investment vehicles, such as 401(k) plans and IRAs, have been exhausted.
The tax-free growth of an annuity may make sense if you have more money to put up for retirement, especially if you are currently in a high-income tax bracket. There are some big disadvantages to annuities.
For starters, you must be able to put the money away for a long time. When you make withdrawals during the first five to seven years of your investment, you may be charged a surrender fee of up to 7% of your investment. Other large costs are routinely charged by annuities, such as an initial commission of up to 10% of your investment. If you buy a variable annuity, you'll pay a 2% to 3% annual charge for investment management and other services.
It's also important to remember that no matter how long you've had an annuity, you'll be taxed as ordinary income if you take money out of it. Although today's maximum income tax rate is 39.6%, you can rest assured that it will not rise in the future if you have a long time before you retire.
Look into annuities if you're approaching retirement and want to build and secure your retirement income, or just want to keep some of your money out of the market while protecting it from market risk.
