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Part 2: Thinking About Annuities? Here Are 10 Things You Need To Know

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Part 2: Thinking About Annuities? Here Are 10 Things You Need To Know

Yesterday we covered the first five things you need to know about annuities, from their tax advantages to the ability to switch from one annuity to another. Today we cover the last five things you need to know if you are considering an annuity as part of your retirement plan.

6. Some Annuities Make Sense In A Tax-Deferred Retirement Account, Others Don’t

Putting a tax-deferred annuity inside a tax-deferred retirement account like an IRA might sound like a waste. But for some types of annuities, like a fixed indexed annuity, it can actually make sense. As we covered yesterday, fixed indexed annuities allow you to take advantage of the index’s upside without worrying about a loss. A deferred income annuity can also make sense in an IRA. This is if you plan on starting your withdrawals at age 72 as required. The type of annuity you should not have in an IRA is a variable annuity. After all, the fees for tax deferral don’t make sense in tax-deferred IRA.

7. Make Sure You Understand The Fees of “No Load” or “No Fee” Annuities

The issuer of the annuity needs to turn a profit after paying commissions and covering expenses. So even “no load” or “no fee” annuities have fees, these costs are just called something else and baked into the product. For fixed annuities these costs typically aren’t large enough to matter. For some variable annuities, however, buyers should pay attention to fees and costs. They should get a clear understanding of what they are paying and what additional costs they could incur before signing the paperwork.

8. Naming Someone Other Than A Spouse As Your Beneficiary Create A Tax Event

If your spouse is named as your sole beneficiary, upon your passing they will have the option to file a claim taking the entire distribution. Alternatively, they can assume ownership of the annuity, avoiding a taxable event.

A non-spouse beneficiary won’t have the option to assume ownership. Additionally, he or she will have to pay taxes on the increase in value of the annuity when it is distributed to them.

9. You Will Pay Penalties For Early Withdrawal – But There Is An Exception

Just like if you took a withdrawal before 59 ½ on any other retirement account, you will pay a 10% penalty plus ordinary income tax to the IRS if you start withdrawing from your annuity before you turn 59 ½. There is an exception, however. If you take a payout from a lifetime income annuity and immediately put that money into an immediate income annuity, you aren’t subject to the penalty and can start receiving annuity income before 59 ½ years of age.

10. Red Flag: The Annuity Salesperson Might Not Have Your Best Interests In Mind

Selling annuities requires state licensing. However, the person selling you the annuity does not have to meet the “fiduciary rule” meaning they are acting according to your best interests. Instead, they only have to meet the “suitability standard” which is a much lower ethical requirement. The suitability standard only means that the salesperson is selling you something that is suitable, not necessarily your best option.

Interested in learning more about annuities and how they can help you reach your retirement goals? Speak with your financial professional to discuss your options.

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