Usually you need to think about an annuity only following you've maxed out other tax-advantaged retirement investment automobiles, like 401(k) plans and IRAs. When you have extra cash to set aside for retirement, an annuity's tax-free development might make sense – particularly if you're inside a high-income tax bracket these days.
Annuities have some substantial drawbacks. For 1, you have to be prepared to sock away the cash for many years. In the event you make a withdrawal inside the initial 5 to seven years and also you usually will probably be hit with surrender charges of as much as 7% of one's investment or much more. Annuities often charge other higher charges also, generally such as an initial commission that may be as much as 10% of one's investment. In the event you buy a variable annuity, ongoing investment management as well as other charges frequently quantity to 2% to 3% a year.
These charge structures may be complicated and unclear. Insurance coverage agents and other people who sell them might tout the good attributes and downplay the drawbacks, so make certain that you simply ask a great deal of concerns and cautiously evaluation the annuity strategy initial.
Prior to you invest, you need to evaluate that charge structure with normal no-load mutual funds, which levy no sales commission or surrender charge and impose typical annual costs of much less than 0.5% (for index funds) or about 1.5% (actively managed funds), and figure out whether or not you may be much better off going that route by yourself.
It is also essential to know that earnings you withdraw from an annuity will probably be taxed as ordinary earnings, regardless of how lengthy you've owned the account. The maximum earnings tax price these days is 35%, but if you have got a whilst prior to you retire, you are able to be particular tax prices will not improve.