Annuities are investment contracts offered by insurance companies for retirement planning. Different types of annuities address the various needs of individual investors. For example, annuities can be structured as fixed, variable, lifetime or deferred to accomplish investors' unique retirement goals. Fixed annuities, like their counterparts, provide benefits and risks that should be carefully considered.
Fixed annuities offer guaranteed interest rates not affected by economic volatility. They are generally promoted by issuers as being low-risk investments. Taxes on interest are deferred until retirement. They can be invested for short-term or long-term periods to suit your retirement age. They can provide lifetime payments after retirement and can offer insurance provisions for payouts to heirs that avoid the hassle of probate.
Fixed annuities may miss opportunities for larger retirement savings growth. They may also not allow additional deposits to the contract to increase principal investment. Younger investors may fall short of retirement goals because fixed annuities' growth rates may not keep pace with rising inflation. Fixed annuities also lack a wide range of investment options and asset diversification.
Fixed, and other annuities, are not insured by the Federal Deposit Insurance Corporation. Individual states do provide guaranty programs to insure annuity contracts, but state insurance coverage programs significantly vary. For example, the state of Alabama insures annuity contracts up to $100,000. Colorado's guarantee program covers up $250,000, and New York offers coverage of $500,000.
Penalties & Fees
Annuities generally carry tax penalties and fees for withdrawing money before age 59 1/2. The Internal Revenue Service charges a 10-percent tax penalty for early withdrawals. The IRS may waive penalties under circumstances such as medical emergencies and college tuition needs. Generally, insurance companies also charge surrender fees in the neighborhood of 15 percent for early withdrawals, though fees vary between insurance companies. Also, deferred taxes must be paid at the time of any withdrawal.
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