Annuities seem to get more popular with every passing year. Part of the reason for this lies in their tax deferred growth benefit. This is to say that money put into an annuity does not have its earnings taxed. Eventually though, the owner of the...
Fixed retirement annuities are in many ways like investing in CDs. They pay guaranteed rates, in many cases higher than CD rates, and they provide convenient, predictable payments. While this stable, dependable source of income may be ideal for some retirees, it may not be ideal for everyone.
A fixed retirement annuity offers the following advantages:
- They pay a guaranteed rate of interest. For those wary of the volatility of the stock market, this could be a plus.
- They offer a low minimum investment. The minimum investment for retirement annuities is typically $1000- $10,000, making it an affordable option for many.
- The interest earned is tax free until withdrawal.
Some disadvantages of a fixed retirement annuity include the following:
- The rates may adjust after a certain period of time.
- If you decide to withdraw your money due to an unfavorable rate adjustment or for any other reason, some annuities have expensive surrender fees.
- Generally, payments on fixed annuities do not increase to keep pace with inflation. Consequently, you have less buying power over time. Some annuities offer options, albeit often expensive options, for payments to increase over time to keep pace with inflation.
- Retirement annuities often have limited, bland investment choices.
- Income on withdrawals has no tax advantages. It is taxed as ordinary income.
- Fixed retirement annuities lack liquidity.
Fixed retirement annuities may be a good idea if any of the following situations apply:
- You have already maxed out contributions to 401(k) s and IRAs. Once these more favorable tax-deferred investments have been exhausted, annuities can provide a source of additional tax-deferred retirement income.
- You prefer investing in mutual funds to individual stocks. While individual stocks provide a greater potential for gain (or loss), mutual funds are generally more stable and predictable.
- You plan to keep your annuity for the long term (15+ years) since it can be costly to get out of an annuity product.
- You are currently in the 28% or higher tax bracket but expect to be in a lower tax bracket once you retire.
- You won’t need to make withdrawals prior to age 59 ½.
- You are not concerned about the tax consequences for your heirs. With annuities, your heirs will have to pay taxes on any gains.
- You want a guaranteed source of income for the rest of your life.