One of the main reasons people are buying annuities is to help create a source of income to help fund their retirements. What are annuities? They’re in the simplest terms an insurance products what will create a source of income for a period of time — typically for the rest of a person’s life. There are a number of different kinds of annuities, and each one has it’s benefits and disadvantages. Generally, there are three basic things that are fundamentally wrong with annuities, and here’s why you should avoid them.
1. That tax deferral doesn’t last forever
One of the benefits of annuities is that there is a tax deferral for those funds as they go into the annuity and as they grow. The issue is that those gains will be taxed when you receive distributions from the annuity at regular income rates.
2. You’ll be penalized for early withdrawal
This is true with a number of different retirement fund options. To be able to benefit from the tax deferral in the first place, you can’t touch the funds in the annuity until you’re 59 and a half years old — or pay a pretty hefty penalty for doing it.
3. Your heirs will have to pay your taxes
Another seemingly attractive benefit of buying annuities is that it can be passed on to an heir in the event of the owner’s death. You might think you’re doing your family a favor by leaving them your annuity, but any gains it sees will be taxed — and they’ll have to pay for it.
If it’s too late and you’re already locked into an annuity, you do have another option. If you find that the disadvantages of owning the annuity are outweighing the benefits, you might want to sell it. There are a number out there that will buy your variable, equity index, immediate, or fixed annuities. Basically, you surrender the annuity to the company, and they pay you an annuity lump sum payment.