Annuities are a complex financial product. You may have heard of the downsides such as the fact that you can’t access the money beyond receiving the scheduled payments. The returns won’t be as great as if you had invested the money in the market. There can be tax implications of investing in an annuity that most people don’t take the time to understand before they sign the contract. But there are many benefits to using annuities. We are here to help you understand the benefits of annuities for your future.
It Can Reduce the Risk of Saving for the Future
One of the points in favor of annuities is that it removes most if not all of the risk of investing for retirement. You may make monthly payments for twenty years into the annuity, or you may roll over a lump sum from a retirement account or a pension. You agree to a certain level of risk. For fixed annuities, the rate of return is spelled out in the contract. For variable annuities, the risk is the level you select. It may be a low level of risk or a moderate level of risk, but it is always a lower level of risk than if you were day-trading or investing in “hot” stocks. You won’t get the full 10% returns of a bull market, but you will get much more than if you left money invested in bonds. The trade-off is often worth it for those facing retirement. You cannot lose your principal. And you can choose to always receive cash flow. For example, the 7% return you receive instead of the 10% market growth is offset by the 3% returns you’ll get even when the market is down. Take the time to understand how the various types of annuities work. You can learn more here.
You May Be Able to Save More than You Otherwise Could
Many tax-advantaged retirement accounts have contribution limits. 401Ks have higher contribution limits than IRAs, but that’s only an option if you work for an employer that offers a 401K. A SEP IRA has a higher contribution limit than traditional and ROTH IRA. There is no contribution limit for annuities. Nor is there a limit to how much you can rollover into an annuity. The growth on the annuity principal is tax-free. This results in a larger nest egg than if you were investing the money in a taxable mutual fund.
There Are Tax Benefits in Some Cases
One of the downsides of annuities is that you can be hit with taxes and penalties if you take money out of the annuity. On the flipside, this may prevent you from using the retirement vehicle as a source of emergency cash. In fact, too many people cash out their 401K every time they change jobs and use it to pay off debt or raid their IRA when they need money.
We’ve already mentioned that the growth in an annuity is tax-free. The withdrawals from the annuity may or may not be tax-free. If you invest in an annuity within your Roth IRA, it is tax free. An annuity within a 401K would not be.
You Have Control
You have significant control over the annuity’s structure. You can set it up to distribute money monthly, quarterly or annually, though the name refers to the fact that it traditionally paid out once a year. You can add riders such as a death benefit that pays for your funeral or continues paying to your surviving spouse on your death. You can invest the money in higher investments within the annuity, though this may be a separate rider that results in additional fees.