Is an annuity suitable for me?

First, let’s make one thing clear. You should not be considering the purchase of an annuity unless you have fully funded or intend to fully fund your IRA, 401(k), or 403(b) for the year. These investments occur before income tax and are the first step to planning for your financial freedom.

If you have fully funded or plan to fully fund those retirement plans this year and have additional funds to invest, where will you put the money? Mutual funds? Bonds? Annuities? Probably all are present in a well-rounded, well-managed, diversified portfolio. Read on to learn about some important advantages of annuities that can make them an excellent complement to a well-rounded portfolio. The annuity is a place to invest an unlimited amount of money without paying any current taxes until you start to take money out. You can also use an annuity as a funding vehicle for an IRA, Roth IRA, 403b, SEP IRA, or other retirement plan, if suitable.

Invest Unlimited Funds, Tax Deferred

An annuity is similar to a retirement plan in that they both have the advantage of tax-deferred compounding until withdrawn. However, there is no limit as to how much you can invest in an annuity or annuities.

Death Benefit Provision

Another important feature of some annuities is the death benefit provision, a feature inherent in most every annuity in one degree or another. The annuity issuer guarantees at a minimum that upon your death your total premiums are paid to your beneficiaries. Many annuities “step-up” on the anniversary of the date the annuity was purchased, to the highest value at any preceding anniversary; or guarantee a minimum 5% to 7% interest compounded annually, and some will even combine the greater of the two features. For example, take a scenario in which you invest $10,000 in a variable annuity with an annual step-up in death benefit. Then let’s suppose that several years later, on the investment anniversary, your variable annuity has grown to $40,000. Now assume that the market drops and the value of your variable annuity shrinks to $25,000. And just when you think things couldn’t get any worse, you die. In this example, your surviving beneficiaries would receive the highest value on the anniversary of the purchase, in this case $40,000. Death Benefits apply mainly to variable annuities, vary greatly, and usually come at an additional cost ranging from zero to .50%, so contact Annuity FYI to make sure that you get the best annuity to meet your family’s needs. In addition, all guarantees are subject to the claims paying ability of the insurer, so be certain to check the financial strength ratings of the insurance company before investing.

Additional Benefits

There is no qualifying of any kind with an annuity, and so long as you are not receiving payments (deferral phase only), there is no IRS reporting of any kind (no 1099 or tax bill). An additional benefit of an annuity is that they are not attachable by most creditors and they avoid probate in all 50 states.

Important Considerations

That said, investors need to be careful to understand the annuity into which they may invest. First, it is important to consider the rating of the insurance company issuing the annuity, particularly in the case of a fixed annuity. Second, it is important to understand the level of fees paid to the brokers that market the annuities on behalf of the insurance company. Unfortunately, many agents, brokers, financial planners, and others who market annuities have been known to overstate annuity advantages, and sometimes recommend annuities based on the fee the broker will receive, rather than the appropriateness to the individual investor. It is also important to note that any withdrawal from an annuity may be subject to taxes and a 10% federal penalty if taken prior to 59? years of age

For more considerations, see our Annuity FYI Checklist, or contact an Annuity FYI Expert to see if an annuity is right for you. If you’re already sure, click here to learn about the different, specific types of annuities, and see those that Annuity FYI believes to be the top annuities available on the market today.