Annuity Investment Tips

If you are searching for an alternative retirement plan, consider investing in annuities, such as fixed deferred annuities. Learn why annuities are good investments, how the fees and disbursements work, who should invest in annuities and what you should consider before investing.

Why Invest     

Annuities provide guaranteed consistent income that is not affected by the market, so they have reduced risk. In addition, annuities are pretax investments, so the wealth is tax deferred. Some annuities offer lower costs and expanded fund options.

The wealth of those with annuities tends to last longer, and annuities offer legacy planning with reduced tax burdens on the heirs. For example, heirs may receive a lump sum or regular incomes without an additional tax burden.

Money

Annuities are tax-deferred initially, but during the payout period, investors pay income rather than capital gains tax rates. However, non-qualified or post-tax investments may result in a portion of the distribution being tax free.

In addition, they have multiple fees, such as administration, mortality and expense, rider and assessment fees. Commissions are also charged.

Investor Profile

Annuity investors should already be investing the maximum amount into their IRA and 401K accounts because these accounts have lower fees. Annuities are long-term investments, so investors should not need this income for 10–20 years or more, until they are at least 59 ½ years of age, to avoid penalties. These investors should also be in the 25% or higher tax brackets to benefit from the tax incentives.

Considerations

Before investing in annuities, individuals should research the insurance company thoroughly. For example, what is the company’s Standard & Poor’s or AM Best credit rating. Make sure the company is financially secure and reputable.

Review how the interest rates, which are based on 10-year treasury rates, affect or change your disbursements. Ask about penalties for early withdrawal and payout restrictions, including how much of the principle can be withdrawn within one year without penalty. In addition, can the annuity be transferred to another insurer without penalties or tax implications? What is the surrender period for large withdrawals?

Learn about the expected market yield after 6 months and 1 year because it may decrease significantly. In addition, your gross yield will be reduced by the fees the insurer charges, so ask about your net yield. Find out if your annuity is adjusted for inflation, which may reduce payments initially, but will pay off in 10–30 years.

if you are considering annuity investments, learn why you should invest, the monetary implications, who should invest, and what investors should consider before investing in annuities.

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