There are lot of myths about annuities. With so many types to choose from, figuring what is factual and what isn’t about them can be a challenge. To help you understand how annuities work, here are 6 of the most common falsehoods about them.
All annuities are the same
Although annuities share many common attributes, each annuity type has its own set of rules. In general, an annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and, in return, you receive a regular income stream at some point in the future. There are a range of options, but typically they fall into two categories – an immediate annuity and a deferred annuity. An immediate annuity allows you to make a lump-sum deposit and immediately start drawing income. With a deferred annuity, you give an insurance company money and the company pays it back at a later date based on a guaranteed interest rate. Typically, you’d not start getting payments until years down the road.
I can’t withdraw money from my annuity until I’m old
Many annuities give you the option to withdraw a portion of the contract without a penalty. Some annuities may require a waiting period before you can access the full value. You may be subject to fees and penalties for an early withdrawal, but many insurance companies allow you to take up to 10% of the accumulation value per year without paying fees.
All annuities have high fees
Most annuity types have no maintenance or annual fees. Those that do will have varying fees depending on the type of annuity and any additional benefits it may provide. Annuities can offer valuable features that aren’t typical of other investment options, like tax deferral, income guarantees, guaranteed minimum values or even a guaranteed minimum death benefit. Your annuity contract should be transparent about costs, so make sure whatever company you’re working with high ratings. Make sure you understand any fees associated with the annuity
I will lose all my annuity money when I die
If you don’t want the insurance company to keep your contract value when you die, you can choose an annuity option with that feature. Everything the annuity can and cannot do should be written in your policy. Many people believe a company will keep the money if they have a “life-only” payment option within an annuity contract, but life-only is just one of many payment options you can choose from for an annuity contract.
Annuities are for retirees
Annuities can be excellent tools for accumulation and income, no matter your age. Many young workers are using annuities as a tax-deferred to save for their future. Of course, no two situations are the same. It’s important to seek tax advice from a qualified tax professional when purchasing an annuity to understand any withdrawal penalties that may apply.
Annuities are bad for taxes
Interest credited on any annuity will compound on a tax-deferred basis until you begin taking out money. Over time, you may have the potential to build more retirement income than you would have been able to had your earnings been taxed as income. While IRAs and 401(k)s also offer tax deferral, those contributions typically have a yearly cap. Fixed annuities commonly have no annual IRS contribution limits. Fixed annuities are long-term, tax-deferred products and can be a valuable option if you are looking to grow your retirement income.