When To Choose An Annuity: Thing to Consider Before Choosing Your Retirement Annuity

Fixed annuities are similar to CD’s but offer a lot more benefits to most people. If you’re young, a fixed annuity may not be the right savings vehicle for your situation, however. The reason is also one of the benefits. All annuities offer a tax-deferred growth because the government considers them retirement vehicles. However, if you need the money before you’re 59 you may find yourself in a dilemma.

That might sound a little odd, but it just the nature of tax deferred products and plans. The fixed annuity is a retirement product, just like an IRA or 401K. Like any retirement product, if you remove money before you’re 59 , you pay a 10 percent penalty. In the case of the annuity, it’s on the interest only. Younger people shouldn’t put all their money into retirement vehicles because of the tax laws and penalties.

If, however, you’re close to 59 or past it, you’ll find that the tax-deferred growth is to your advantage. While you’re earning higher income and in a higher tax base, you grow the funds tax-deferred. Once you retire and your income drops, you can withdraw the funds your fixed annuity. While the growth is still taxable, you pay the taxes at a lower rate.

You need to be careful because of the taxation rules for annuities. The rules of LIFO apply in this case. LIFO is an acronym for last in, first out. It means for tax purposes, the IRS considers the last money into any fixed annuity contract is the first money you take out of it. Since interest builds after principle goes into the contract, that money is the interest. If you withdraw a large amount, you are right back to square one with a higher taxable income. The best method is to take funds out over several years. If you want the money sooner, consider taking an amount equal to half the interest late in the month of December and request the balance of the funds early the following year.

While some people frown on the use of a fixed annuity for already tax-deferred funds, such as IRAs or 401k rollovers, you need to look at the rates before you put the annuity out of the picture. Annuities have a tax advantage already, just as the IRA does. Some financial planners suggest you shouldn’t use an annuity for money that’s already tax advantaged. It does, however, make sense to do that if you get a far better rate on your annuity and better access to the money.

Access to the funds is important in retirement. Most CDs don’t give you the ability to take any of the principal without penalty, just the interest. With a fixed annuity, many companies offer a 10 percent invasion right in addition to allowing you to take your interest, without any penalty attached.

You can do the same thing if you break apart your lump sum and put some in very short term CD’s and then mix the due dates of the other CD’s so they come due at different times. The caveat to this is that you often get a lower return on your money by taking smaller CDs for shorter periods. There’s also no guarantee that the CD will be due just when you need it the most. The right to withdraw funds from an annuity bypasses this problem.

Check into a fixed annuity and see if it fits into your financial plans. It’s one way to diversify your funds, an important planning tool for everyone. A fixed annuity is a secure investment that gives you peace of mind and great benefits.

Ryan N. Matthew dispenses advice, marketnews, and facts that investors should consider before choosing the best anuity insurance for their retirement. Choosing the best annuity is a big decision and you should get all the facts, and look at all the annuity options. Come see us to learn more about annuities, or to get the best fixed annuity quote.