The risks involved with annuities

Though the concept of annuities is a common one, you have to understand that there are certain risks associated with it. To begin with you have to deal with a range of taxes when you decide to withdraw the money. There is no such thing as capital gains for annuities. Irrespective of the kind of account you hold, the money has to be withdrawn as regular income. All of the money, except your profit portion is taxable. Should you not have withdrawn the money before your death, it automatically becomes a part of your estate and runs the possibility of being taxable under estate laws.

If you have invested in a deferred annuity, then the amount is already taxed. That is why IRA should be on your primary list of investment options. These accounts too, have some restrictions. If the money is withdrawn up to 6 months from you turning 60 years old, then a 10 per cent federal tax penalty as well as income tax is slapped on. If you feel that your annuity could perform better, then opt for the 1035 exchange.

Once you have hit the prescribed age, you can withdraw the money in various ways. You could choose from a lump sum or a fixed monthly interest. If you opt for the second one, there is no way you can change your mind later. And in the event of the account holders’ death, the money goes to the spouse, till they too pass away. After this the amount goes to the insurance company.

The fees on tax-deferred annuity payments are pretty high and there can be fine print. Read thoroughly the all the documents before you sign on. In fixed interest rates, the fees work in such a way so as to reduce the potential of the principal amount. This is the way business works. Therefore it is necessary to run a comparison of the fixed rate annuities fees. Make sure that the
rate given during the guarantee period matches what is offered when you surrender at the end of tenure. This will ensure that you get the right amount when withdrawing and not have to surrender charges.

The surrender charges begin at 5 per cent and go up to 8 per cent. Over time, they will gradually drop to zero. The fees involved in annuity transactions can be very high. Annuity fees can be extremely high sometimes. This is to appease the tax laws. There are ways however to bring these to a reasonable level.