Get the Details Right On Annuities
Last week, we covered the fact that IRA season is here again. Today, I will explain where an IRA can be invested.
Billions of dollars are invested annually into tax-deferred annuities, which offer an income stream that cannot be outlived. Annuities can be described as the opposite of life insurance. Life insurance pays a benefit after you die while annuities pay a benefit to you while you live. Both products are offered by life insurance companies.
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There are two types of annuities: deferred and immediate, which are used strictly for income purposes, not for growth.
Although annuities are a place to invest IRA money, many experts contend that because of the tax deferral benefit of annuities, an IRA may be best suited for non tax-deferred products. This is because an IRA is a tax-deferred shelter in itself. One feature of an annuity is if you annuitize an annuity (start taking out the money), you can never outlive the income.
Variable annuities offer investments in mutual fund investment companies. This type of annuity can be used as a hedge against inflation. This is also the riskiest of the annuities because you are at the mercy of market fluctuation. By investing, you sacrifice safety, usually with a lower rate of return for a chance at (a higher return). It is very difficult to achieve safety and a high return. Fees are charged by the companies offering variable annuities, and it is wise to compare these costs. Some insurance companies offer investment strategies of having your money diversified into different mutual funds with different objectives. The idea behind diversification is to limit the amount of risk by allocating money into different investment sectors.
Another type of annuity is a fixed annuity. This annuity has little risk, mainly the financial strength of the company offering the annuity. The fixed annuity is a very simple investment where an insurance company offers a rate of interest in exchange for the opportunity of holding your money for a predetermined period of time. This exchange of time is called surrender charges. There are penalties imposed by the company if you surrender your annuity too soon. These surrender periods fluctuate from no years to as many as 19 years. Always check the surrender charges on an annuity before investing your money.
Another type of annuity that has gained popularity in the past few years is the index annuity. This is a fixed annuity that has the benefit of being tied to the upside of the stock market indexes, such as the S&P 500. If the market index goes up, you enjoy the growth, but if the market goes down, your money is protected. This is a way to be tied to the market but not really invested in it, therefore making it safer than a variable annuity or an individual stock.
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Annuities can be a good place to put money whether it is into an IRA (qualified) or an after-tax investment (non-qualified). Annuities offer a place to park retirement dollars.
For more detailed information you may call our office. Be sure to ask my assistant Kathie for your free copy of the Retirement Risk Matcher book.
Whatever annuity you choose, be sure to get the details before investing any money. Check out the financial strength of the company offering the annuity and pay attention to the fees and surrender charges, as well. Remember, it is your money we are talking about.
Source: daiilysouthtown.com 03-2007