A great investment, but
so misunderstood! This page will summarize the most important features of
annuities and give you links to more information. Spend five minutes on
this page and you’ll know whether you should spend more time
investigating annuities. For more information on these topics, check the
box on the right.
Is an Annuity Right for You?
Two of the most important reasons why
people buy annuities are:
- While they’re saving for retirement they buy annuities to defer
taxes—perhaps enabling them to save more than with taxable investments
such as mutual funds. If you’re saving for retirement, an annuity may be
right for you, especially if you’ve already exhausted other alternatives
such as IRAs,401(k)s, and 403(b)s. Annuities are especially appropriate as
a long-term investment alternative to mutual funds.
- Once you retire, an annuity can generate monthly income as long as
you live. With life expectancies increasing and the length of retirement
growing, income for life can be a very attractive feature.
Fixed vs. Variable
The distinction between fixed and
variable annuities is one that often confuses investors.
Fixed annuities are often associated with
the payout stage, and variable annuities are more often associated with
the savings or accumulation phase. However, both types of annuities may be
used to save for retirement, and both types may be used to generate
monthly payments once you retire.
With a variable annuity the payout varies
depending on the investment returns of the funds you chose. Fixed
annuities provide fixed payments or payments that vary based on a
predetermined formula.
Subject to important differences,
variable annuities are similar to mutual funds in that their values will
fluctuate with the market. Fixed annuities offer a more conservative
approach for those unwilling to take on market risk.
Annuity Taxation
The most important thing to remember
about annuity taxation is that as long as you don’t take money out,
there are no tax consequences for having an annuity. Not only are taxes
not due during the accumulation phase, but you don’t have to report the
annuity on your tax return at all. (No 1099 forms!) When you make
withdrawals or begin the payout phase, you’ll begin getting 1099s.
Two other important points regarding
taxation:
- Whether
you’re in the payout or accumulation stage, any income you actually
receive from an annuity is taxed as ordinary income rather than as
capital gains.
- If
you withdraw money prior to age 591/2, you may be subject to an IRS
tax penalty of 10% of the accrued earnings.
Annuities and Other
Retirement-Oriented Investments
Even if you’re not yet an annuity
expert, you’re probably familiar with other types of investments that
can be used to save for retirement or provide income during retirement.
The following chart compares different
types and forms of investments and retirement-oriented financial products.
We assume that an "outside" annuity or "outside mutual
fund" is not part of any 401(k) or IRA.
|
|
Outside
annuity
|
Outside
mutual funds
|
401
(k)
|
Traditional
IRA
|
Roth
IRA
|
|
Deducted from paycheck
before tax
|
no
|
no
|
yes
|
no
|
no
|
|
Type of taxation
|
income
|
dividend/
capital gain
|
income
|
income
|
none
|
|
1099 before
payout/withdrawals
|
no
|
yes
|
no
|
no
|
no
|
|
Tax deferral
|
yes
|
no
|
yes
|
yes
|
yes
|
|
Investment limit
|
no
|
no
|
yes
|
yes
|
yes
|
|
Early withdrawal penalty
|
yes
|
no
|
yes
|
yes
|
yes
|
|
Employer sponsored
|
no
|
no
|
yes
|
no
|
no
|
|
Deductible from income tax*
|
no
|
no
|
no
|
yes
|
no
|
* If meets income criteria.
Things to Consider in Choosing an
Annuity
Once you’ve decided an annuity may be
right for you and chosen the basic type of annuity—fixed or variable,
accumulation or payout—you’ll have to choose among many different
annuities from hundreds of companies. We’ve made the process a lot
simpler by gathering some of the best annuities, both variable and fixed,
from leading annuity providers.
Some of the most important things to look
for include:
Fees and expenses
What is the asset charge?
How about fund fees?
Is there a surrender charge?
Are there other expenses?
Fund Choices
How many funds can you choose from?
Are you allowed to switch funds without Expense?
Are these the funds you want?
Who are the fund managers?
What are their track records?
How Do You Get Information and Manage
Your Account?
Over the Net? Is information available
all the time?
Is it easy to use the customer service section?
Who Stands Behind Payment of the
Annuity?
How
long have they been in business?
Are they a stable company you can expect to be around long into the
future?
|
