You are thinking of investing in an annuity but before you decide, you should know the Good, the Bad, and the Ugly. Take your social security for example. This is a fixed, indexed annuity that pays you for the remaining days of your life, while a pension is a fixed annuity that pays for life. An annuity is an insurance product that provides you with reliable income. Below are five “Good” and eight Bad (Ugly) factors of an annuity investment according to forbes.com.
The Good
- Invest in Low-Cost Variable Annuity. If you have a higher income and fall into the high tax bracket. If your 401(k) and IRA deferrals are maxed out and you anticipate having a lower tax bracket once retired. These annuities charge less per year.
- Income. A low-cost fixed or variable annuity is favorable for producing an income stream from a lump sum investment if you can live with a specific amount of your funds being tied up forever or an extended time.
- Longevity Annuities. If you’re concerned with outliving your assets. This annuity allows you to set a percentage of funds into a deferred fixed annuity and receive a percentage paid out monthly until you pass away. If you pass before reaching that point, your principal may be returned without interest. You may forfeit the annuity entirely if you pass away after you have begun to receive your payout.
- Predictability. In an attempt to prevent poor 401(k) returns, the government has initiatives which allow 401(k) investors to place a portion of their account into an annuity.
- Payback for Good Deeds. Charitable annuities provide a tax-deductible portion of your donation as a stream of income for life.
The Bad and Ugly
- Variable annuities can have higher annual fees and severe surrender penalties.
- Annuities sound good but are difficult to understand.
- Your after-tax funds annuity investment will disappoint if you fall into a lower tax bracket but rise in retirement due to your 401(k) and likelihood of tax rate increase.
- You’ll trade lower capital gains tax rates on taxable income to higher income tax rates on all annuity gains.
- An annuity is not the answer to defer income from your IRA because your IRA is already tax-deferred.
- A fixed annuity may change your overall financial/investment plan. You are better buying a fixed annuity that will lock in higher interest rates when the interest rates are higher.
- Once an annuity, always an annuity. You may roll funds into a less expensive annuity once free from surrender penalties but never terminate the annuity.
- Annuities invested in equities have no step-up in basis to the date of death value of a position when the initial owner passes away. So not a great inheritance to leave behind.
With Insurance Hub, you come first. Your financial future is our priority. Call one of our experts at (888) 838-4482 to get more information about whether investing in an annuity is right for you.