When you are looking for a place to put your future retirement money and be able to have it grow tax-free, buying an annuity may be the ideal choice. Annuities are a form of investment that enables you to put money away in a tax-deferred shelter for the future. Most annuities pay out the money either in a lump sum, or as monthly payments – for the rest of your life. As good as this sounds, there are several advantages and disadvantages to consider.
Annuities are savings plans that are usually sold by insurance companies, and they earn interest at either a fixed-rate or at a variable rate. Fixed-rate annuities offer a lower rate of interest, but it will earn interest at that rate continuously. Variable-rate annuities have the interest tied to market conditions, and depend on the way the company chooses to invest the money.
One powerful advantage of an annuity is that the interest earned on them is tax-deferred, and taxes are only paid on the money as it is withdrawn. This enables you to start earning interest and not have to be concerned about paying any taxes on it – until the money is needed after you retire. You can also set it up to get payments for a limited time – or for the rest of your life.
You are also allowed to put into an annuity account all the money you want – there really is no limit, says Money.CNN. This feature can make them better than an IRA or 401(k). Like either one of those instruments, however, there is a heavy penalty for withdrawing early.
Investopedia mentions that annuities have the advantage that they are generally protected from creditors, although it may vary some between states. In addition, they are exempt from probate, too, all across the nation.
Annuities will provide you with money throughout your entire life – however long that may be. This is true even if it costs more than what you paid into it, or have earned in interest.
One disadvantage of an annuity is that, unlike life insurance, an annuity does not pay any money to your beneficiaries. It can do this, however, if you are willing to pay extra for that option. Another option you can get is a cost-of-living adjustment.
According to the U.S. Government Accountability Office (GAO), in a report called Retirement Income, Americans are advised to look for means to prepare for retirement. One of those methods that it suggests is that you put money into annuities so that you can put off Social Security payments, which will enable you to get larger payments when you do get them.
When you decide it’s time to consider specific companies for buying an annuity, take time to look into the financial standings of the company. Some good companies, ones that people thought would be around for a long time, have recently collapsed – to most everyone’s surprise. Kiplinger suggests that you use A.M. Best to determine a company’s solidity before buying. Also, be sure to shop around for the best deal, and compare annuities carefully. Make sure, too, that you understand all fees that will be involved in the annuity, and consider your payout options.