Wednesday, August 10, 2011

Annuities - Investing Money For and in Retirement

Investing money in annuities offers advantages over other popular investment options like bank CDs and traditional mutual funds. This is true whether you want to invest money for retirement or in retirement.

Ideal candidates for investing money in annuities would be people in their peak earnings years who want to invest money for retirement and get a tax break. Annuities are good investment options IF you plan to stay invested for at least 7 to 10 years; and you won't need this money until you are in retirement. Tax-deferred annuities have traditionally been offered in two basic forms, and are issued by life insurance companies.

Basic FIXED ANNUITIES are similar to bank CDs in that they pay investors an interest rate that is fixed for a period of time. For example, the issuer might guarantee an initial interest rate and then periodically adjust the rate over time based on the interest rate environment.

An advantage of investing money in fixed annuities is that they generally pay higher interest rates than you can get at the bank. The second advantage is tax deferral.

VARIABLE ANNUITIES in their simplest form resemble mutual fund families. They offer various investment options. Tax deferral is again an advantage here. For example, you can invest money in one of their stock funds and later switch to one of the other investment options without income tax consequences.

Tax deferral is the signature of annuities in general, and this makes them especially attractive to folks in a higher tax bracket. Here's an example of why people invest money in a tax-deferred retirement annuity (annuities).


You are investing money to build a retirement nest egg and are in one of the higher tax brackets. If you invest where you are subject to ordinary taxation you will pay income taxes each year at this rate on interest and other earnings. So, instead you invest money in an annuity.

Now your money grows uninterrupted by income taxes as long as it stays invested. When you are well into retirement you start pulling money out as you need it. You should then be in a much lower tax bracket.

Retired folks often buy annuities as well. They like the higher interest rates, and the fact that they can name a beneficiary (to bypass probate).

When investing money in any annuity be careful. Extra features can be both confusing and expensive. A plain vanilla fixed annuity can be quite simple, but there are variations that can be confusing. You should NOT pay money up front to invest in any annuity.

A variable annuity can be more complicated. Make sure you understand all of the charges and fees you'll be paying.

When you invest money in an annuity you receive a contract that spells out the agreement between you and the insurance company. Make sure you understand the surrender charge schedule before you invest money. If you cash in early you could get nailed by heavy surrender charges ... and by the IRS in the form of taxes and/or penalties.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

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