1. You Invest money
2. Choose an Annuity (box)
3. You are confused and think what options to choose
4. You pick a few funds in the Annuity
5. Time passes and you gain value
6. Gains are tax deferred
7. You grow old and at 59 1/2 you take money out
8. Money is taxed in LIFO manner
Now let us piece this together, You want some alternative to retirement accounts and look into an Annuity, now you decided to invest in an annuity and have to choose the funds that are in the annuity box. After some thought you choose a couple and let time pass; the benefit to you is that your gains are tax deferred. Finally the day comes where you turn 59 ½ and you pull the money out of your annuity, unfortunately the government now comes for your money and you are taxed in a last in first out manner (LIFO). All gains are taxed as ordinary income.
Types of Annuities
Variable: Most flexible annuity, you can continue as much or as little money as you want and when you want. Also the most volitile out of the 3.
Fixed: Not very flexible, can only contribute once and then your annuity is locked in till withdrawal age, people do this because it is like buying into a CD from the bank but with a higher return on investment.
Index: Blend of risk between variable nad fixed, typicall follows indices in the market and has a protection against losses. As well as a cap on the amount you can gain. Usually done for people who need income and little to no risk.
Why Would You Open One Up?
There a few reasons why you would be interested in opening an annuity a few of the main reasons are listed below
• Self-Employed and maxed out all other retirements contribution and want more tax deferred growth
• Older and want a steady “fixed” rate of return on your money without having the swings of the market
• Index annuities have a protection against losses, a safe way for investors who are older to collect money without potential loss risk.
The Good, The Bad, and The Ugly
• Often a great way for self-employed to open up another retirement savings when other plans are maxed out for the year (The Good)
• You have to wait till 59 ½ to pull your money out and when you pull the money out you are taxed immediately on your gains from a LIFO manner. (The Bad)
• You are restricted to their funds usually under 30 choices and many typically have very high expense ratio’s as well. (The Ugly)
Overall, it is best to consder your overall financial situation before jumping into an annuity as it might not always fit your situation or needs.