Wondering whether or not an annuity is right for you? Not sure if annuities are to be embraced or hated? Before you blindly follow your broker's advice, you should know the objective facts.
Delaying Uncle Sam
Pro: Tax deferral is the main benefit on any annuity. While funds inside an annuity grow, they aren't subject to income or capital gains taxes. Keep in mind that an IRA is already tax deferred, so using an annuity to hold an IRA may not make sense unless you're using the annuity for some other significant benefit like principle protection.
Con: While funds inside an annuity are indeed tax deferred, that doesn't mean they are tax free. When distributions are taken from an annuity, they are taxed at ordinary income rates. So, if you're going to be in a top tier tax bracket in retirement, then an annuity may not be your best fit.
Income For Life
Pro: With most employer pensions having disappeared, an annuity is one of the few remaining ways you can guarantee your own private pension. This can be very comforting knowing that you have an income stream to cover all your major expenses - and you'll never outlive it.
Con: Insurance companies are in business to make money. That means that in exchange for guaranteed income, you'll have to give something up. That could mean paying heavy fees or accepting CD-like returns on the beneficiary value of the annuity.
Extras/Perks
Pro: Optional riders offered by most annuity issuers will allow an investor to customize to contract to meet their needs. You can choose to maximize lifetime income or leverage the death benefit for a beneficiary.
Con: While riders add customization, they also usually add separate fees. These fees can vary greatly among issuers, so it's up to the investor to consider what's important and whether or not the fees are justified by the benefit.
Access to Funds and Exit Fees
Pro: Some annuities will offer 100% liquidity from day one, so they can be a good place to park emergency funds that are earning near zero interest rates.
Con: While some annuities offer 100% liquidity, most do not. They generally will come with only 10% liquidity until a 7-10 year period has passed. The early surrender charges can be high in some cases, so you'll want to make sure any contract you purchase will satisfy a long term financial goal. The last thing you want to do is make a mistake that will be haunting you for years to come.
Learn more about annuities in our Annuity Wisdom guide.
