Annuities are very popular investments, often used to generate retirement income. You can buy them at any point in your life, but generally, they do not reach maturity until you are at retirement age. Annuities are protected from taxes to a certain degree and can be willed to a beneficiary. Some people also use annuities to protect funds that can be passed on to their children. But before you purchase an annuity, familiarize yourself with some of the drawbacks.
Commissions
Most financial brokers charge fees to help set up and manage an annuity--as much as 10 percent of the investment. By investment standards, that's very high, and it isn't much--if any--cheaper going through a bank.
Early Withdrawal Fees
Your broker might charge an early withdrawal fee if you take funds from your annuity before its maturity. This fee is generally greater if you withdraw money early in an annuity's life, but the fee can run as high at 20 percent. Additionally, any withdrawals made before you are age 59 1/2 are subject to a 10 percent charge by the Internal Revenue Service.
High Annual Fees
Various annual fees, such as an insurance charge, management and other miscellaneous fees, can run cost up to 2 percent or 3 percent of the annuity's total value each year. If your annuity struggles in a given year, these fees can wipe out any profit made in that year.
No Capital Gains Treatment
Income earned from annuities is treated as regular income instead of capital gains, as some other investments are. This leads to higher taxation and pins a fair amount of your annuity's financial success on whether tax rates increase or decline in the future. You can use tax projections, but that's a bit of a gamble.
Member Comments