When it comes to saving for retirement, annuities are often overlooked. That may be because of the misconception that they're only for those nearing retirement. As a result, people (and younger savers in particular) tend to stick with more traditional investments for their retirement planning.
But depending on your goals, time frame and risk tolerance, a type of annuity known as a deferred variable annuity can provide some certainty in your financial planning and help you take advantage of potential stock market growth (which also comes with the potential of loss). Here are four reasons you should consider incorporating a deferred variable annuity into your retirement strategy.
A DEFERRED VARIABLE ANNUITY HAS INVESTMENT ACCOUNTS
While annuities involve making a payment to an insurance company in exchange for guaranteed payments back to you over time, deferred variable annuities allow you to save money by putting it into investment sub-accounts.
You get to choose which accounts your money goes to. You typically have many different fund choices designed to align with your individual financial situation; such as money market, fixed-income, growth, balanced and international funds, to name a few. Variable annuities also allow for investors to transfer money from one investment option to another without incurring any tax liability at the time of transfer. They also typically offer tax-free, automatic rebalancing.
And, if you need your money for another purpose, there are ways to take it out of the annuity and move it elsewhere.
A DEFERRED VARIABLE ANNUITY HAS TAX BENEFITS
Qualified accounts that hold IRA or 401(k) rollover money offer tax benefits when you’re saving for retirement. While you can use traditional investment accounts to get these tax benefits, you can also use a deferred variable annuity.
But you can also get tax benefits for your non-qualified dollars (any money that isn’t earmarked in a tax-qualified retirement account). When you put non-qualified dollars into an annuity, the money you invest will grow tax-deferred, much the way it does in a traditional 401(k). This means your money could grow and compound faster. However, it’s worth noting that when you get to retirement, you will pay ordinary income tax on any growth when you withdraw your money, similar to other tax-qualified investments like 401(k)s and traditional IRAs.
With other types of long-term non-qualified investments, you typically pay capital gains tax (usually less than ordinary income tax) on your growth each year, rather than just in retirement. It’s a good idea to consult with a tax professional and your financial advisor to discuss what makes the most sense for your situation.
A DEFERRED VARIABLE ANNUITY MAY NOT BE AS EXPENSIVE AS YOU THINK
There’s no shortage of information about how expensive annuities are. Some are expensive, but many are not. Typically, the cost of annuities is tied to the guarantees they provide. If you’re not looking for those guarantees, in many cases you can find deferred variable annuities that may end up being cost efficient over time.
YOU PAY LESS WHEN YOU CONVERT A DEFERRED VARIABLE ANNUITY TO AN INCOME PLAN IN RETIREMENT
When you build an income plan for retirement, annuities can play a key role in helping you make your money last for decades.
If you think you’ll want an annuity as part of your retirement income plan, buying one when you’re years from retirement could save you in the long run. That’s because with a deferred variable annuity, you pay the commission when you initially buy it. Then when your annuity is converted into retirement income (that is, when you start collecting the money from your annuity for retirement), you typically would pay a much lower commission than if you had invested the money into a traditional investing account, and bought an income annuity when you were ready to retire.
Keep in mind: While annuities can have a lot of flexibility, they typically work best when they’re part of a long-term plan. That’s why it’s so important to consider the company that you’re choosing when buying an annuity. Make sure that company has a long track record of solid financial performance. A financial professional can help you evaluate whether an annuity makes sense for your situation.
Variable Annuities are sold only by prospectus and you should carefully consider the investment objectives, risks, expenses and charges of the investment company before investing.
The underlying investment funds in a variable annuity are subject to market risk, including loss of principal, and are not guaranteed.
Variable annuities are subject to fees and charges, such as mortality and expense charge, annual contract fee, sales load versus surrender charges, and portfolio expense fees.
Withdrawals from annuities may be subject to ordinary income tax, a 10 percent IRS penalty if taken before age 59 ½, and contractual withdrawal charges.