In many cases, annuities are used as retirement investment vehicle. They provide the investor with a tax deferred way of calculating interest. There are many types of annuities for different investors with many options, their opportunity for a sizable return, and their safety. Variable annuity is often considered as the riskier annuity. The investor is able to invest the annuity in the stock market, or in mutual funds. Any person over the age of 60 will receive monthly payments, depending on the results of the investments.
If the investor is not 60 years of age, he will still receive the tax benefits, but he won’t get the payment until he reaches 60. Variable Annuity can be for a fixed time period or for life. Most of these annuities offer a money market sub account. This will allow the investor to switch to a secure fixed rate, at any point of time.
Advantages of Annuities :
If you look at the stock exchange market, especially S & P 500 who have an annual return averaging 12%, while historically Fixed Annuities, Treasury Bills, and secure Bonds usually offer single-digit interest rates. A Variable Annuity will allow you to earn much higher returns.
All annuities are tax deferred, and it will be beneficial for many investors over other investment vehicles. It will provide you inheritance probate-free, thereby allowing your loved ones to avoid estate taxes. You can also provide gifts which are completely free of tax up to $10k per year, per person.
Fixed annuities do not provide such higher liquidity like variable annuities. You can make withdrawals as much as 10% annually in the first year without any sort of penalty. And if there is any market change and you are not feeling confident about it, you can move to a fixed rate of interest, providing a very secure investment vehicle. Based on the current market conditions, you can change you risk/return.
Disadvantages of Annuities:
Variable Annuities are not that secure like Fixed annuities or CD’s. When you put your money in the market, it means that you are willing to risk your share. There are some management fees, just like a mutual fund. You must check the commissions or the fees involved.
This investment will give you enough liquidity, but it is not the right one if you need that money tomorrow. Income withdrawals before the age of 59.5 years or by more than the allowable percent per year will result in a 10% IRS penalty.
You must do all your research before putting your money in the market. Overall variable annuities are a good investment vehicle to grow your nest egg tax deferred, but at the same time, there are lots of risks involved. Always seek professional help before making this important decision.
Helpful Resources:
http://www.sec.gov/answers/annuity.htm
http://en.wikipedia.org/wiki/Annuity
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