Understanding Annuities: Advantages and Disadvantages
An indexed annuity can be a great way to save for retirement on a tax-deferred
basis, in effect creating your own personal "pension" plan. As with any investment,
however, there are also potential disadvantages that should be evaluated before
purchasing an indexed annuity.
An indexed annuity provides the opportunity to benefit from a rising stock
market with an interest rate linked to a market index, while also offering a
minimum guaranteed interest rate.
Indexed annuity earnings are tax deferred so long as they remain in the
annuity. When compared to an investment whose earnings are taxed each
year, tax deferral offers the potential for accumulating significantly higher
amounts of money over time.
An annuity can be used to provide a steady source of retirement income that
you cannot outlive.
Unlike an IRA or employer-sponsored retirement plan, there are no annual
contribution limits to an annuity…you can contribute as much as you want.
Subject to the terms of the contract, there is no required date by which you
must begin receiving annuity income payments, providing you with the
flexibility to defer payments until you need the income.
If you die while your annuity still has value, the annuity death benefit passes
directly to your beneficiary without probate.
In most states, an annuity is free from the claims of a creditor.
Premiums for a non-qualified annuity are not tax deductible, meaning that
they are made with after-tax dollars.
While you can surrender or make withdrawals from an annuity before you
begin receiving income payments, the surrender or withdrawal may be
subject to a charge if made within a stated number of years after the annuity
is initially purchased. Withdrawals will reduce the value of the death benefit
and any optional benefits.
There is a risk of losing money if the issuing company does not guarantee
100% of the principle and no index-linked interest is credited, or if the
indexed annuity is surrendered while a surrender charge is in effect.
If made prior to age 59-1/2, a surrender or withdrawal will be subject to a
10% federal penalty tax unless one of the exceptions to this tax is met.
When received, investment gains are subject to ordinary income tax rates and
not the lower capital gains tax rate.
Once annuity income payments begin, the payment amount cannot be
changed and withdrawals above the payment amount generally are not