What's Bad About Annuties

Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 st1\:*{behavior:url(#ieooui) } /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:11.0pt; font-family:"Calibri","sans-serif"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:"Times New Roman"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi;}

Annuities are an excellent retirement investment but there are serious drawbacks to such vehicles that you should be aware of. If you are planning on using them for retirement income you should be aware of the bad features of annuities.

 

Withdrawing Funds Early from An Annuity can be Hard and Costly

An annuity is designed to provide a stream of regular long term income. It is not supposed to be used like a bank account. Most contracts contain vesting fees and other charges for early withdrawals. On some plans this can be as much as 10% or higher. To make matters worse the IRS charges a 10% tax penalty on withdrawals from annuities made by persons under 59½ years old. This penalty is charged in addition to the owner’s regular income tax rate.

 

The lesson here is clear only put money that you are certain you will not need in the foreseeable future in an annuity. Never purchase such a plan until you have a large amount of money in a savings account, money market, CDs or easy to access arrangement. Never think of an annuity as an emergency reserve or a savings account.

 

Annuity Income is Subject to Income Tax

Annuities are tax deferred not tax exempt that means you will have to declare payments from one on your tax form. Such income can raise your tax rate and tax bill. Yes putting money in an annuity can reduce your tax bill right now but you will have to pay taxes on those funds at some point in the future.

 

Something to remember is that you may not receive the payments until you are older and have a lower income-tax rate. That means you might be able to save money because you will be paying less taxes at that point. The tax rate for senior citizens is lower than that for younger people. There are also deductions which could offset any taxes on those payments.

 

Annuities are Designed as a Source Long Term Income

The idea behind an annuity is to provide a steady source of long term income. Many people get themselves into trouble by purchasing one then realizing that they will not need that long term income.

 

A fixed annuity would be a good investment for a 60 or 65 year old who can expect to live for another twenty to thirty years or longer. It would be a poor choice for an 85 year old who will only live for a few more years. Only purchase such a plan when you or a beneficiary needs a source of long term income.

 

Annuities are Poorly Understood

The worst thing about annuities today is that they are poorly understood. Even though this kind of investment is becoming far more common many people including lots of investment professionals know little about such vehicles.

 

There is a great deal of misinformation and vague generalizations about annuities in circulation. Financial journalists in particular are prone to writing scare stories to the effect that all annuities are rip offs. The problem is that these pieces are usually poorly researched and often based on information provided by “experts” that make their living selling competing financial products.

 

That means you should definitely get the facts before putting your money in an annuity. Read up on the subject as much as possible, and research every plan carefully. An excellent way to get information is to look into several different plans and sales outlets before making a choice.

 

Always remember that annuities are designed to lock in money for the future. They are contracts that take time, money and effort to break so learn what you are getting yourself into before investing.