Why
are annuities popular?
Annuities are generally sold as a way to
accumulate assets for retirement (with taxes deferred until money is withdrawn),
and/or as a convenient method for delivering income during retirement. They generally
come highly recommended by sales agents due to the large commissions the agents
receive.
Does The Henssler Financial
Group recommend use of annuities for our clients?
No. We recommend
maximizing contributions to qualified retirement plans, annual IRA contributions,
and investing additional funds in individual, common stocks, or high-quality fixed
income securities, depending on when funds are needed from the portfolio. Holding
stocks defers capital gains until the stocks are sold, and portfolios can be structured
to pay high dividends or low dividends, depending on the need for income. Tax-efficient
equity mutual funds are also an effective way to save funds on a tax-deferred
basis. Also, remember that stocks' cost basis is stepped up at the death of the
owner, while annuity values are not stepped up. Often, the annuity value, or a
portion of it, evaporates at the owner's death.
Be aware of annuity expenses.
The average variable annuity insurance annual expense is over 2% versus 1.4% for
mutual funds. In addition to the annual expense, other annuity costs may include:
front-end loads, surrender charges, commissions paid to the selling agent, state
premium tax, or an annual flat charge.
Tax deferral may not be worth
what you think. When you take distributions from an annuity, a portion of the
distribution may be considered a return of principal, while the remainder is taxed
as regular income (maximum rate of 35%). Every distribution you take is taxed
based on pre-determined rules, allowing you little flexibility in determining
when to pay taxes. However, in a stock portfolio, you can decide whether or not
you wish to sell stocks with large gains or losses, and therefore better control
when you pay taxes on your gains. Long-term capital gains are currently taxed
at a maximum rate of 15% (5% if you are in the 10% or 15% tax brackets).
Should I sell my annuity
if I already have one?
Review your annuity contract and other relevant
financial information with your financial planner. Items to consider include:
declining surrender charge, possible 10% tax penalty on withdrawals, annual expense
fee and investment alternatives. If you have an annuity with large fees and gains,
you may elect a 1035 Exchange for another annuity. Charles Schwab & Co., Inc.,
The Vanguard Group, and Fidelity Investments Life Insurance Company all have low
priced annuities with no surrender charges. If you have an annuity with large
surrender charges, you may wish to hold the annuity, make sure it is invested
in fixed-income securities, and use the proceeds to cover liquidity needs through
distributions.
How much are fixed annuities
currently paying out?
You can check out current fixed annuity returns
using web sites:
