Advice from an Investment Advisor in Centennial – Before You Buy an Annuity
Annuities seem like a great idea in these uncertain times for more predictability and financial security. As investments, annuities are unique and have several advantages and disadvantages as compared to other investments. And, as you consult with your investment advisor in Centennial, annuities may be a vital component in your portfolio to add asset protection, stability, tax relief, and income security. But annuities are not right for everyone. So, here’s some of what you need to know.
Advantages of Annuities from an Investment Advisor in Centennial
Taxed Deferred Income Accumulation
The earnings inside your annuity accumulate tax deferred. Because of this, there is the possibility of greater growth until taxation. The higher your income, the better this is. While you do eventually pay the taxes on these earnings, the idea is to pay at a lower rate when you retire. Even if your tax rates stay the same, you control the timing of the withdrawals. Plus, if the account isn’t a Traditional IRA there shouldn’t be Required Minimum Withdrawal (RMD) provisions, so you can defer the taxes as long as you want.
Fixed annuities pay rates based on the yields from the life insurance company’s investment portfolio. These rates tend to be more than savings or investment vehicles like CDs and money market accounts.
Minimum Rate Guarantee
After initial interest rate guarantees expire, they are adjusted to the current market rates. Higher or lower, but never less than the minimum rate you have stated in your contract.
In a fixed annuity, the assets of the insurance company back the principal balance. The default likelihood is minimal since the highest-rated insurers are safer financial institutions. In addition, there is a guaranty fund in most states to cover annuity losses.
Ability to Access Funds
Normally, you can withdraw up to 10% of the balance annually without charge. After the initial surrender period, you have access to every penny.
Guaranteed Income for Life
The one financial objective that an annuity uniquely achieves is guaranteed income for life.
Reduced Taxes on Your Social Security
Usually, Social Security is tax-free. But, if your income goes over a threshold, up to 85% of your benefits could be taxable. That includes interest earned from any tax-exempt bonds, but your annuity income remains exempt.
Protection of Assets
Annuities may be exempt from legal actions and creditors. Every state has different rules and limitations on the exemptions, so check on the rules with your Investment Advisor in Centennial for our local limits.
Just like life insurance, your annuity proceeds bypass probate, which protects the funds from delays and any probate expenses.
Disadvantages of Annuities from an Investment Advisor in Centennial
Annuity earnings accumulate tax-deferred, but you pay the taxes when you withdraw the funds, just like ordinary income. This should be an advantage if your tax bracket goes down, but if it goes up, this deferral is a disadvantage.
Penalties on Early Withdrawals
The IRS penalizes any withdrawals you make before you turn 59 ½.
Fees During the Surrender Period
During a specific upfront surrender period, there is a fee if you withdraw more than 10% of the account balance annually. The fees are higher to start, usually between 7% and 15%. They decline each year until they get to zero at the end of your surrender period. Check with your Investment Advisor in Centennial to find out your fees.
Expenses and Fees
Annuities generally have fees and costs that other investments don’t. Fees deducted out of your account cover administration expenses and mortality costs.
Except for withdrawing 10% annually, annuities are not liquid assets. You have access to the money, but the penalties and fees on early withdrawals reduce your principal. Once a deferred annuity converts to an income annuity, you only access the income.
Fixed Interest Rates
As a fixed-rate investment, your funds are exposed to interest rate risks. By choosing a one-year rate guarantee, if interest rates go down, you receive a lower rate in the future. By selecting a multi-year guarantee, if interest rates go up, you miss out on the higher rates in the future.
Annuities are usually best if you have a long-term investment time horizon, could use some tax-deferred growth, and prefer a safe, stable investment. Because annuities have many different types and complexities, you should consider them with an Investment Advisor in Centennial who has experience with annuities.