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Annuity ~ Advantages & Disadvantages

An annuity can be a great way to save for retirement on a tax-deferred basis, in effect creating your own personal "pension" plan.

Annuity Advantages & Disadvantages

An 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 annuity.

Advantages

Earnings on your annuity premiums 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.

Disadvantages

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 a deferred 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.

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 capital gains tax rate.

Once annuity income payments begin, annuity contracts vary in regard to whether the payment amount can be changed and/or whether amounts can be withdrawn from the contract. Ask your licensed financial adviser to explain whether the contract you are considering allows for annuity payments to be increased or decreased and whether withdrawals are available.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

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