It's almost time to start gathering up your W2 forms, investment statements and lists of deductions. However, when you're looking for tax-advantaged ways to build retirement savings, it's tax season all year round. And that's why you might want to consider fixed annuities.
If you're not familiar with fixed annuities, you may be interested in some of their key benefits:
- Tax-deferred earnings -- Your earnings grow on a tax-deferred basis until you begin taking withdrawals, typically at retirement. (When you do take withdrawals, you must first take out earnings, which are taxed as ordinary income.)
- Tax control -- You are not required to take distributions from your annuity at any specified age. Consequently, you decide when to start taking the income and, therefore, when to pay taxes. But be aware that if you take out earnings before you turn 59 1/2, you may face ordinary income taxes and may be subject to a 10 percent early withdrawal penalty and so-called "contingent deferred sales charges."
- Guaranteed interest rate -- Your fixed annuity provides you with a guaranteed interest rate that may be readjusted periodically to reflect market rates. Guarantees are backed by the claims-paying ability of the issuing insurance company. Some fixed annuities offer a specific rate for a specified maturity. But the rates on some fixed annuities can fluctuate within the stated contract period. You may want to avoid these types of annuities; even if your rate drops, you might be ``locked into'' your contract due to high surrender charges.
- Variety of payout options -- You can take annuity payments in several different ways. For example, you could choose to receive a fixed stream of income for life or for a specific period of time.
- Virtually unlimited contribution limits -- You can generally put in as much money as you want into a fixed annuity.
- Avoidance of probate -- Fixed annuities bypass the expensive and time-consuming probate process and go directly to your heirs by naming beneficiaries on your annuity contract.
Although fixed annuities have some attractive features, they are not for everyone. Before you invest in one, contribute the maximum to your 401(k) and IRA, both of which can be funded by investments that can offer a greater growth potential than a fixed annuity.
Even after you have ``maxed out'' on your other retirement plans, carefully consider whether or not a fixed annuity is appropriate for your individual situation. In general, you'll get the most benefits from a fixed annuity if you won't need the proceeds before you reach 59 1/2 and if you're in at least the 25 percent tax bracket today, but expect to be in a lower bracket during retirement.
You'd better shop around
Many companies offer fixed annuities, so you'll want to do some comparison shopping.
First and foremost, make sure that every annuity provider that you consider has received one of the highest ``grades'' for safety and stability from one of the independent rating agencies, such as Standard & Poor's.
Next, look at individual annuity contracts, because they can vary quite a bit. For example, different companies offer different surrender periods, generally ranging from five to 10 years. During this time, you may find it hard to withdraw any money without paying a surrender charge.
What about rates? Since you're buying a fixed annuity, shouldn't you look for the one that pays the highest rate? Maybe -- but keep in mind that the initial rate you sign up for may only last a year, after which it may be adjusted downward. And some companies have offered artificially high rates to attract new investors, only to make drastic cuts later. Consequently, you'll want to look at both a company's current rate and its recent rate-setting history.
As you can see, you've got many factors to consider before purchasing an annuity. Your financial professional can help you determine if this investment is right for you -- so get the help you need before you sign on the dotted line.
