Annuities are just like any other investment: they are a good deal for certain people in certain situations. An annuity is not a good investment for everybody but it can be a good investment for many people.
The main factors in determining whether an annuity is a good investment for you are: are your age, your income level, the amount of income that you can afford to invest, the type of annuity and your retirement needs. Of these factors age is probably the most important factor.
Age and Taxes on Annuities
The main reason why annuities are a bad investment for the young is the present US tax or Internal Revenue Code. This law defines an annuity as a retirement investment. That means it is tax-deferred so no federal taxes are due on funds in one until they are taken out.
The problem with this is that the code imposes a 10% tax penalty on withdrawals from annuities for those who are under 59½ years in age. That means if Cookie was 45 and she withdrew $40,000 from her annuity she would have to pay $4,000 in extra taxes. She would also have to her regular income tax on that $40,000 in addition to the $4,000 penalty.
That means for the average person who is under 45 or 50 an annuity is not a good investment. Only persons with a lot of extra income would benefit from them. An annuity might be a great deal for a person with a high income who wants to reduce his tax bill and ensure a retirement income.
A Good Retirement Investment
The right type of annuity can be a great retirement investment because of the nature of these vehicles. An annuity is a contract between an individual and an insurance company. This contract obligates the insurer to make regular payments to a beneficiary as long as the contract is in force.
If Bert bought a $200,000 life annuity when he was 60 he could receive a monthly payment from the insurance company for the rest of his life even if he lived to be 110 years old. This makes such contracts ideal for people who have a lot of cash right before they retire.
Such contracts are a really good deal for persons with no retirement plan or those who are uncertain about their retirement. Bertha has worked for the same company for many years and she has a good pension. Yet she is skeptical of the soundness of the pension plan. Bertha could purchase an annuity to supplement her pension income.
Deferred vs. Immediate Annuities
Different types of annuity can be good investments for different people. Charley is still working and he has a good income but he has not saved much for retirement. To make matters worse the amount Charley can put in his IRA is limited. Charley could use a deferred annuity to save an unlimited amount of tax deferred money for his golden years. For a person who can invest a regular amount of money each month a deferred annuity can be a good deal.
Glen is in business for himself and he needs to have a lot of extra cash available to cover operating costs. Glen would be best advised to wait until he is ready to retire and purchase an immediate annuity at that time. This kind of plan starts paying out as soon as you buy it so it is ideal for a person that is about to retire.
Yes, annuities can be a very good investment under the right circumstances. Therefore it is always a good idea to conduct a lot of research before buying one.
Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Definition, Annuity Rate, and Best Annuity Rates.
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