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All Annuities Are Not the Same

Wednesday, September 5th, 2018 | Uncategorized | No Comments

By Yvonne Marsh, CFP®, CPA

Recently I read an article written by an investment advisor who disparaged annuities as complex, full of hidden fees, and subject to a higher tax burden when compared to stock investments. He started out referencing annuities in general and quickly devolved into bashing one subset of annuities – a non-IRA variable annuity. I’m not a huge fan of non-IRA variable annuities either, but he did the readers a disservice in not recognizing that there are other types of annuities that can fit a retiree’s lifestyle quite nicely. I’ll provide a little counter balance and discuss two other types of annuities for the more conservative investor.

Fixed annuities are much like a bank CD, where your principal is not subject to market loss, and they pay a guaranteed rate of interest for a guaranteed period of time. They are different than a bank CD in that they are tax-deferred, and they are not FDIC insured. Instead you rely on the strength of the insurance company and the Tennessee State Guaranty Fund. Typical terms range from three to five years, and you can generally withdraw interest without penalty. Plan to leave your principal alone, though, or you can incur declining surrender charges.

Fixed index annuities are also not subject to market loss. They calculate interest by using indexes tied to the markets – the S&P, Nasdaq, etc. Interest credits annually depending on how those indexes perform. If the markets are negative in a given year, you won’t earn any interest – but your principal won’t go backward either. Be aware that they are considered longer term investments, generally 10 years, where you can withdraw 10% of your account without penalty, but excess withdrawals incur declining surrender charges.

Many retirees don’t have pensions anymore, and their biggest concern is outliving their money. So they opt to add a lifetime income withdrawal feature to their fixed index annuity. The insurance company is contractually required to pay lifetime income, even if the retiree outlives his annuity balance. (And for the spouse’s life, too, if they choose a joint-life option). If he passes away early, the remaining annuity balance goes to his heirs. Fees for the income rider range from 0% to 1.5%. Remember all guarantees are dependent on the strength and claims-paying ability of the insurance company. Pick a highly rated one.

Lastly, no matter what IRA’s are invested in – mutual funds, bank CDs, or lifetime income annuities – they are taxed as ordinary income and heirs receive no “step-up” in basis. So choose the investment that gives you the greatest peace of mind. That’s what matters in the end.

Marsh Wealth Management, LLC
1341 Branton Blvd, Suite 105
Knoxville, TN 37922

Financial Planning & Investment Advisory Services are offered through Marsh Wealth Management, LLC (“MWM”), an independent investment advisor registered with the state of Tennessee. Yvonne Marsh is an Investment Advisor Representative of MWM in the state of Tennessee. Marsh Professional Group, LLC is a TN registered public accounting firm and a separate legal entity from MWM. For a detailed discussion of MWM and their investment advisory fees, see the firm’s Form ADV on file with the SEC at www.adviserinfo.sec.gov.

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