Discover the Truth Behind Using Annuities for Retirement Savings

Annuities are financial instruments designed, administered and sold by insurance companies. They come in different packages and the benefits vary widely. Make sure you deal with a reputable agent. Do your research and read your contract to insure you get what you want.

Annuities for Retirement Savings

Annuities are nothing more then a life insurance contract without the death benefit. Generally speaking they are used for long-term savings for retirement income. So when you are looking for an annuity contract it should be as a stand-alone retirement savings vehicle and should not be used in conjunction with an IRA or other retirement account.

The reason annuities are not used within other retirement accounts is because they are tax-deferred contracts that allow for the tax free accumulation of funds to be used at a much later date when presumably your tax obligations are less. Placing an annuity in an IRA can lead to double penalties and highly complex situations when you need distributions to start.

Using annuities, as part of a complete retirement plan can be advisable and help to spread some risk or lower risk over time. Annuities are the only financial instrument that can guarantee income for life, but it comes at a price just like everything else.

Fees for Annuities

Insurance companies are good at charging numerous fees that are hard to figure out if you are not acquainted with them.

Commissions are hard to spot and are high. A good way to get an understanding of commissions charged and not disclosed on annuities is to read your annuity policy and see what the surrender charge are early on in your contract. Keep in mind some annuities do not charge commissions and therefore have no surrender charges. Surrender charges are deducted when you withdraw funds and protect the insurance company from losses as the commissions are normally paid up front to the agent.

Usually there are management fees, asset fees, change fees and a host of other fees. These fees seem to be small but when based on the assets under management can be large over a long-term policy.

Tax Penalties for Annuities

Early withdrawal is defined as withdrawing funds prior to obtaining the age of 59 ½. This amounts to a 10% penalty plus taxation issued by the IRS.

Make sure before you buy an annuity that it is suitable to your situation. If you are in your 20's purchasing an annuity might not be smart because chances are high you will need the money before you reach 59 ½ years old. But if you are in your mid to late forties and you have substantial income and or assets annuities could be a wise choice.

If you are unsure about this or any question dealing with the purchase of an annuity consult with your tax and financial advisor before proceeding with the transaction.

Types of Annuities

There are generally four different types of annuities and many hybrids. The four types are:

Fixed Rate Annuities- These annuities are a savings and accumulation annuity that have a fixed term rate like a CD but are tax deferred until withdrawn. Typically the rate changes annually at the annuity purchase date every year.

Income Annuity- These annuities are used to distribute income from a fixed contribution and are usually guaranteed for life based on mortality tables that insurance employees called actuaries create. A big draw back from the income for life option is that once the income stream starts it can't be stopped or changed and if you die young so does your investment regardless to how much was paid out. Again consult with your tax and financial advisor for any questions or clarifications you might need.

Variable Annuities- This type of annuity is often referred to as a mutual fund within an annuity. The return for this type of annuity depends upon the successful investment in bond, stock or money market funds. These funds have lots of fees and you are usually restricted as to how often you are allowed to change investments and you are usually charged fees periodically (quarterly for most variable products) for investments no matter if you change them or not. These are very complicated products and you would be better off just setting up a mutual fund account in a retirement account.

Index Annuities- This type of annuity is fairly new but the return is based on some outside index like the Dow Jones Bond Index plus or minus a percentage. These can be good but again you must understand the fee structure and be familiar with the indexing used.

Also you have a rescission period usually 10-30 days upon receipt of the policy during whihc you can return the policy for a fully 100% refund. So if you purchase an annuity read the contract as soon as possible and if something jumps out as confusing or to complicated to understand ask your representative or agent to explain immediately. You can also call the insurance company the policy is underwritten by and they will be glad to explain the clause you are unsure about. As always consult a tax or financial expert with any questions before you invest.

Its also important in your research to make sure you are dealing with a highly rated company that has been around for a long time and is reputable. Otherwise in 10-15 years when you need the money they might not be around. Another avenue to research insurance companies is through your state insurance department.

Just remember research and read to make sure you are getting what you thought you were getting in the first place. Always when dealing with complex financial instruments with confusing tax ramifications always consult a tax or financial advisor that you know and trust.