by Guest » Wed Feb 06, 2013 10:01 am
I'm nearing retirement, and am kind of confused which one to choose between IRA and annuities? I have heard that annuities offer more flexibility with withdrawals. Can anyone here please suggest the better way of the two for someone who is around 53 years of age?
Posted: Thu Feb 07, 2013 04:01 pm Post Subject:
am kind of confused which one to choose between IRA and annuities? I have heard that annuities offer more flexibility with withdrawals
andCan anyone here please suggest the better way of the two for someone who is around 53 years of age?
First, no one here can give you a simple answer as to which is "better" between an IRA and an Annuity. Fundamentally, they are not the same, but they share some common characteristics.
An IRA is simply an account in which assets (money, stocks, bonds, mutual funds, certain other property) are held on a pre-tax (contributions are deductible from one's income) and tax-deferred basis and intended to be used in retirement as a source of income. The government will force the money to be used as income beginning at age 70-1/2. (An exception to this is the Roth IRA, which is funded with after-tax money, and has no "Required Minimum Distributions" [RMDs] or other age 70-1/2 rules.) All withdrawals from traditional IRAs are 100% taxable as income (some IRA contributions are made with nondeductible dollars, and those dollars would not be taxed again, but the gains would be 100% taxable).
Nonqualified annuities also permit money to accumulate on a tax-deferred basis, but not on a pre-tax basis. Contributions (known as "cost basis") will eventually be returned tax-free, and all gains are 100% taxable. But without annuitizing, there is no way to get to the tax-free money until all gains have been withdrawn first. And even with annuitizing, there is no way to take money out of an annuity at any age without paying income tax on the gains.
To add to the confusion, agents will sometimes discuss the fact that IRAs limit your contributions while there are no limits to what you can contribute to an annuity. If a person does not have $5,100 to contribute to an IRA or an Annuity, that whole discussion is meaningless. But it sells a lot of annuities to folks who would be better off with a Roth IRA.
IRA assets may be held in an annuity (known as a qualified annuity). But this does not add any extra measure of tax-deferral (think of the "added" protection of a carport built inside a garage -- it offers virtually no added protection). The only advantage of an IRA annuity is the guarantee of principal to a beneficiary if the annuitant dies before the contract is annuitized.
But the internal cost of an annuity over time may surpass the value of that guarantee. There are monthly deductions from the cash value of the annuity every year.
Your choice is not so much between an IRA and an annuity as it is between what type of IRA (traditional or Roth) you will have. If you have fully funded your IRA, your employer-sponsored retirement plan(s), and still have additional funds you wish to save for retirement on a tax-preferred basis, then a nonqualified annuity may be appropriate. If you are not saving anything anywhere, the annuity is probably NOT appropriate, but that choice would be yours to make.
As for withdrawals, annuities are not "more flexible" than an IRA. Prior to age 59-1/2, any withdrawals for reasons other than death or disability, are both taxable and subject to a 10% tax penalty for early withdrawal. After age 59-1/2, only income tax would apply. As stated above, all gains (taxable) must be withdrawn first.
Additionally, except for RMDs from qualified annuities, almost all annuities come with substantial "surrender charges" -- round dollars or, more common, percentages of the withdrawal amount. It is not uncommon to see surrender charges of up to 10% or more for 15 years or longer (I have personally seen annuities with 30% surrender charges for the first ten years, declining rapidly after that for 10 more years).
Surrender charges alone can claim 100% or more of the gains in an annuity. I have seen people put money into one annuity, and take all the money out two or three years later, only to have taken out less than what they put in -- due only to the effect of the surrender charge. Done repeatedly, as some agents have been found guilty of, the individual ends up with almost nothing while the agent collects a fat commission on each new transaction.
Putting your IRA money into stocks, bonds, or mutual funds/ETFs does not expose the money to surrender charges. But it does expose the money to market risk -- the possibility that what you have put in will be worth even less in the future. But you can withdraw the money at any time (prior to age 59-1/2, there is still the possibility of the 10% tax penalty, but there are several "exemptions" from the penalty that do not apply to nonqualified annuities). An IRA held in an annuity would still be subject to surrender charges even if there were no tax penalty.
So if you have heard that annuities are more "flexible" when it comes to withdrawals, don't believe it.
The only other advantage that annuities have to offer that IRAs outside of annuities do not is the potential for a lifetime stream of income. An IRA held outside an annuity that shrinks to $0 in value is over and done with. An annuity that has been annuitized can never run out of money (unless the insurance company that issued the contract runs out of money).
Recently, many annuities have begun offering "guaranteed lifetime withdrawals" without annuitizing the contract. One must understand that taking these withdrawals depletes the cash accumulation, which affects future earnings in the cash accumulation, and are costly. There is an internal fee deducted from the annuity value to provide the benefit (it's important to remember that there is no such thing as "free insurance" -- even if the President of the US stands in front of the TV cameras and says, "It will be free, your insurance company will pay for it."). These withdrawal benefits are causing insurance companies major fits because they have not been setting aside enough reserves to pay for them -- even though their own actuaries told them so.
You need to find a local knowledgeable insurance agent to work with you on this. It will take a thorough analysis of your financial situation to determine the most suitable ways to deal with your goals and objectives. Few agents put that much effort into their practices.
Posted: Mon Feb 11, 2013 10:36 am Post Subject:
Annuities are often not recommended due to the high fees charged on them (just because they promise insurance protection). IRA-s on the other hand, allows you to invest in a wide variety of investment plans.
However, annuities can ensure more tax-advantaged savings or be arranged in a way that it pays out a stipulated sum as a regular income post-retirement.
To each its own. As Max has pointed out, you need to find out about your financial condition first and plan accordingly.
Posted: Mon Feb 11, 2013 02:23 pm Post Subject:
annuities can ensure more tax-advantaged savings
Only in comparison to a taxable account. The OP is comparing IRA to annuity -- in which case there is no added benefit as far as "tax-advantaged" is concerned.Add your comment