When To Choose An Annuity: Thing to Consider Before Choosing Your Retirement Annuity

Written By: Ryan N. Matthew on November 30, 2009 One Comment

If you want a safe investment but don’t want to put more money into CD’s you’ll find that a fixed annuity is a viable choice. These products function similarly to CD’s but have a few additional advantages. Of course, with every benefit there is a drawback. One of the features of fixed annuities is the tax-deferred growth. This also makes the product not as viable for younger people not close to the age of 59 .

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 those close to 59 or older, the tax-deferred growth is a wonderful opportunity. During your working years, while your income and tax base is higher, you can tuck your money away and get tax-deferred interest. Once you retire and your income drops along with your tax-base, simply remove the interest and pay lower taxes on your return.

Be aware, however, annuity tax rules include LIFO. That means, last in, first out. Interest is always the last thing into a contract, so it comes out first for tax purposes. When you remove money from an annuity, consider spreading it out over several years. If you need the funds quickly, remove enough of the funds to take half the interest in December of one year and the other part the following January. Of course, if you have a summer emergency, you simply bite the tax bullet and are happy you had the money you needed for your emergency.

Depending on the financial advisor you select, you’ll hear mixed messages on the use of a fixed annuity to fund an IRA or 401K rollover. The reason is the duplication of tax-deferral. While the purchase of an annuity because of it’s tax-deferred basis alone would make a foolish selection, if the interest rate is higher than other fixed instruments, then it is a logical candidate to fund a tax-deferred plan. This is especially true if you have more rights to access your money in the annuity.

The right to remove some money without a penalty is important. Most of the time CDs offer you the ability to take your interest but charge a penalty if you touch your principal. Some annuities, however, allow you to remove as much as 10 percent from the contract every year before the surrender period ends without an additional charge.

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 anuities, or to get the best fixed annuity quote.

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