Are Annuities Right for You?

Annuities are financial products sold by insurance companies that allow you to put aside money, have it increase each year without paying taxes and then trigger a stream of future payments on a timetable you can control. Unlike IRAs, there's no income limit on how much you can place in an annuity.

By being in a pool with other annuity customers, insurers can offer attractive returns. Those who pass away at younger ages effectively subsidize more attractive income streams and benefits for longer-lived annuity holders.

There is a whole range of products labeled annuities, and some are much better than others are. You need to be really careful before you jump in. Although annuities are heavily sold, they are not right for everyone. Even if they are appropriate for you, it's important to pick the right kind.

Know the Basics
If you're worried that you might outlive your savings, consider an annuity. They can come with an array of features, such as:

• Death benefits.
• Inflation protection.
• Emergency cash.
• Charitable gift features.
• Indexed return features.
• Fixed returns: a fixed series of payments under conditions determined when you buy the annuity.
• Variable returns: your returns are based on the investments chosen.

And what if you want to get rid of an annuity you no longer want or need? You have several options that depend on three things:

• How long have you owned the annuity?
• The amount of the surrender charge—the cost of making early withdrawals.
• The tax consequences of taking out money.

Tax and Finance Implications
Note that generally, if you own the annuity inside an IRA or other retirement account, you can cash it out and reinvest the money without a tax hit as long as it stays in the account. Any money that you withdraw from a retirement account (other than a Roth IRA) is taxed at your regular income tax rate. If you own an annuity outside a retirement account and cash out, you will typically owe taxes on any earnings at your regular income tax rate, not the lower capital gains rate reserved for most other investments. The part of the payout that represents a return of your initial investment would be tax-free.

Annuities have life insurance protection, frequently guaranteeing that you never receive less than what you paid in. But financial planners caution that the rate of insurance company management fees and charges should be carefully reviewed and understood.
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Also be aware of:

• The details behind any performance guarantees. If there's a minimum return guarantee—what is the time duration? Make sure these annuity facts are explained.
• Annuities can be structured to trigger payments for a fixed number of years to you or your heirs.

You can tailor an annuity to meet specific timing, family and retirement needs. Make sure you understand exactly what's entailed in the plan you choose—all the insurance charges, fees and conditions that may govern subsequent decisions you might need to make. When you buy a retirement annuity, it's vital to consider the financial strength of the insurer.
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Let us know if you're thinking about an annuity, and we can help guide you in your long-term financial plans.