Unveiling the Hidden Truths of Annuities: 5 Things You May Not Know
Annuities are a complex financial product that can help you achieve various financial goals. In addition to providing guaranteed income, some annuities also allow for growth of savings through accumulation-building annuities. These come in different types, such as fixed annuities and variable annuities, each with its own features and benefits.
Income annuities, which provide lifetime income either immediately or at a future date, are recommended by many financial experts for retirees to ensure they never run out of money. However, not everyone may need an income annuity, especially if they have other guaranteed sources of retirement income.
It is a common misconception that individuals have to pay a sales charge when purchasing an annuity. In reality, the insurance company pays the selling agent’s commission, so all the money you deposit goes directly into the annuity. There may be fees if you surrender the annuity early or take excessive withdrawals, so it’s important to understand the terms and conditions before investing.
Annuities offer the ability to guarantee an interest rate for up to 10 years through multi-year guaranteed annuities (MYGAs). These annuities function similarly to bank CDs, providing a fixed rate of return over a specified period. There are no government-imposed limits on how much you can invest in a nonqualified annuity, making them a flexible option for those looking to allocate a large lump sum.
Annuities can also be a useful tool within retirement accounts like IRAs or Roth IRAs. MYGAs can serve as a bond substitute, offering guaranteed returns that may exceed other fixed income options. Fixed-indexed annuities provide market-based growth potential while protecting your principal. Additionally, qualified longevity annuity contracts (QLACs) allow you to defer required minimum distributions (RMDs) from your retirement accounts until age 85.
Understanding the different types of annuities and how they can be utilized in various financial scenarios is essential for making informed decisions about your retirement savings. Working with a financial advisor can help you navigate the complexities of annuities and determine the best strategy for your individual needs.