The biggest advantages annuities offer is that they allow you to sock away a larger amount of cash and defer paying taxes.
Unlike other tax-deferred retirement accounts such as 401(k)s and IRAs, there is no annual contribution limit for an annuity. That allows you to put away more money for retirement and is particularly useful for those that are closest to retirement age and need to catch up.
All the money you invest compounds year after year without any tax bill from Uncle Sam. That ability to keep every dollar invested in working for you can be a big advantage over taxable investments.
When you cash out, you can choose to take a lump-sum payment from your annuity, but many retirees prefer to set up guaranteed payments for a specific length of time or the rest of your life, providing a steady stream of income.
The annuity serves as a complement to other retirement income sources, such as Social Security and pension plans.
Many annuities sound like great moneymakers, but there are often hidden fees that can cut into any profits the annuity pays out, so buyer beware.
Commissions: For starters, most annuities are sold by insurance brokers or other salespeople who collect a commission that can be steep - as much as 10% or so.
Surrender charges: You're also likely to face a prohibitive surrender charge for pulling money out of an annuity within the first several years after you buy it. The surrender charge typically runs about 7% of your account value if you leave after one year, and the fee generally declines by one percentage point a year until it gets to zero after year seven or eight. Note that some annuities come with even heftier surrender charges - up to 20% in the first year.
High annual fees: If you invest in a variable annuity you'll also encounter high annual expenses. You will have an annual insurance charge that can run 1.25% or more; annual investment management fees, which range anywhere from 0.5% to more than 2%; and fees for various insurance riders, which can add another 0.6% or more.
Add them up, and you could be paying 2% to 3% a year, if not more. That could take a huge bite out of your retirement nest egg, and in some cases even cancel out some of the benefits of an annuity. Compare that to a regular mutual fund that charges an average of 1.5% a year, or index funds that charge less than 0.50% a year.
Also, as with a 401(k) or IRA, in an annuity, it's generally not a good idea to take out any money until you reach age 59 ½ because withdrawals made prior to that are hit with a 10% early withdrawal penalty.
Source: Cable News Network.
Retrieved from: money.cnn.com
FINRA Compliance Reviewed by Red Oak: 716617
1) must include the following Fixed Annuity Disclosure near link/article:
Fixed Annuities are long term insurance contracts and there is a surrender charge imposed generally during the first 5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.