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Is an Annuity Right 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.
But 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An annuity is similar to a retirement plan in that they both have the advantage of tax-deferred compounding until withdrawn.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.
Benefits and Features
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.
Additionally, Many annuities offer features and benefits that are not found in other investments (such as mutual funds). The most popular include Death Benefits and Living Benefits. Learn more about the primary features of variable annuities.
Multiple Investment Choices
Many variable annuities allow you multiple investment choices ranging from fixed accounts, fixed income, money markets, small cap, mid cap, large cap, domestic, international, specialty, and sector funds, allowing investors to employ growth, value, and blend strategies. Many permit investors to choose from multiple fund family choices, such as funds from Fidelity, Alliance, Putnam, Janus, MFS, T. Rowe Price, and more.
Most variable annuities allow you to move freely between the various fund sub-accounts without incurring any cost. Furthermore, transactions between the different investment choices generates will not generate a tax bill (1099).
That said, investors need to be careful to understand the annuity in 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 59½ 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.