Understanding Annuities

July 28, 2023

Depending on your investment profile, you may want to consider including an annuity as part of your investment portfolio. Annuities can have features that provide a more moderate approach to help build retirement savings. They can also be used to create an income stream you can't outlive.

What is an Annuity?

An annuity is an insurance product that provides a tax-advantaged way to save for your future and can offer a variety of benefits and features not available on other types of investments. The availability of so many options can make annuities confusing to understand.

Misconceptions About Annuities

If you've been apprehensive about considering annuities, you're not alone. Some have heard misinformation about annuities. Others might have a hard time understanding annuities because there are so many types on the market today. Each offers different savings features, payouts, fees and surrender periods.

The pros for buying an annuity are:

  • They are a tax-deferred way to save for the future.
  • They can create guaranteed income or income protection.
  • They can offer features that limit or eliminate downside risk.
  • They can provide an income for your family if you pass away.

The cons:

  • Added benefits or features will typically incur charges or fees, understand them before buying.
  • Annuities are not intended for liquidity, understand any surrender charges before buying.
  • Annuity gains will be taxed at your ordinary income tax rate when you begin withdrawals.
  • Since annuities were created to assist with retirement, a 10% early withdrawal penalty will be imposed if you take out your money before age 59½.

Should I Consider An Annuity?

Your individual investment profile should dictate which investment options are best suited for you. A financial advisor can help by evaluating your specific goals, risk tolerance, liquidity needs and time horizon. An annuity product will be recommended as an option only if it is appropriate for your specific situation.