When To Choose An Annuity: Thing to Consider Before Choosing Your Retirement Annuity
Fixed annuities are similar to CD’s but offer a lot more benefits to most people. If you’re young, a fixed annuity may not be the right savings vehicle for your situation, however. The reason is also one of the benefits. All annuities offer a tax-deferred growth because the government considers them retirement vehicles. However, if you need the money before you’re 59 you may find yourself in a dilemma.
The government doesn’t give out benefits without adding a few strings. Just like the IRA, 401k or Roth, if you remove the money before you’re 59 1/2 , you’ll find that you’re faced with not only the taxes on the growth of the annuity but also a 10 percent penalty. You can avoid this by taking substantial periodic payments but if you really need the money, that defeats the purpose since its based on your life expectancy, so they’ll be quite small.
For people closer to retirement, the fixed annuity is an ideal choice because of its tax-deferred status. During the working years taxes are higher due to a higher income. Once you retire, however, the drop in income means a lower tax rate. You can remove the interest and pay less.
There is a federal taxation law for fixed annuities called LIFO. That is the short way of saying last in, first out. It means that the interest is the first thing you remove from the annuity, so if you have a substantial amount of interest in the product, you may end up paying just as much. You can avoid that problem, however, by stretching your payments over several years or taking annuity payments, which receive different tax-treatment.
While some people frown on the use of a fixed annuity for already tax-deferred funds, such as IRAs or 401k rollovers, you need to look at the rates before you put the annuity out of the picture. Annuities have a tax advantage already, just as the IRA does. Some financial planners suggest you shouldn’t use an annuity for money that’s already tax advantaged. It does, however, make sense to do that if you get a far better rate on your annuity and better access to the money.
Access to the funds is important in retirement. Most CDs don’t give you the ability to take any of the principal without penalty, just the interest. With a fixed annuity, many companies offer a 10 percent invasion right in addition to allowing you to take your interest, without any penalty attached.
You can do the same thing if you break apart your lump sum and put some in very short term CD’s and then mix the due dates of the other CD’s so they come due at different times. The caveat to this is that you often get a lower return on your money by taking smaller CDs for shorter periods. There’s also no guarantee that the CD will be due just when you need it the most. The right to withdraw funds from an annuity bypasses this problem.
It makes sense to look at fixed annuities as part of your financial plan. Just like any investment, you need to diversify and not put all your eggs in one basket, but a fixed annuity could be a very beneficial basket to use when you want a safe and secure investment.
Ryan N. Matthew dispenses the latest advice, marketnews, and facts that investors should consider before choosing the right anuity insurance for their retirement. Choosing the best annuity is a big decision and you should get all the facts, and look at all the annuity options. Come see us to learn more about annuities, or to get the best fixed annuity quote.
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