With an annuity, you can supplement income to help with making up a “shortfall” that exists between what you generate from Social Security and/or an employer-sponsored pension and your essential and non-essential living expenses.
But with so many different types of annuities, it can be difficult to narrow down which one – if any – is right for you. In addition, with so many “moving parts” on annuities, you’ll want to know what you can (and can’t) anticipate from the annuity going forward.
The Biggest Annuity Buying Mistakes
Even if a particular financial vehicle is right for you, there can still be some hiccups in terms of how it is set up or how much you put into it. This holds true with annuities, as well. So, it is important to avoid the most common annuity buying errors. These include:
- Allocating too much money to the annuity
- Choosing the wrong income payout
- Accessing more than the penalty-free amount during the surrender period
Although annuities can be a great source of guaranteed income, it is recommended that you do not “put all your eggs in one basket.” This is particularly the case with immediate annuities that are converted to income right away because you could be left without enough liquid cash for other needs or financial emergencies.
Choosing the wrong income payout can also be a key mistake when choosing an annuity. As an example, if you are married, you may wish to include your spouse as a joint income recipient. So, make sure that this alternative is offered on the annuity that you purchase. Otherwise, income could stop suddenly – even if it is still needed going forward.
It is also recommended that you know how long the surrender period is on an annuity that you’re considering – and that once you purchase an annuity, you do not access more than the penalty-free amount (which is oftentimes up to 10% of the contract value each year) during the surrender period. Otherwise, you could incur an early withdrawal penalty (in addition to taxes that may be due and/or an additional 10% early withdrawal penalty from the IRS).
What to Do If You Purchased the Wrong Annuity
If you find that you’ve purchased an annuity that really isn’t the best fit for you, there are some things that you may do. For instance, depending on whether or not the annuity is still within its “free look” period, you could just simply return the annuity to the insurance company and receive a refund of your money.
On the other hand, if you have held the annuity for a longer period of time, it may be possible to transfer or “exchange” the annuity, tax-free, through a 1035 exchange transaction. Under IRS Section 1035 of the Internal Revenue Code, investors are allowed to exchange a life insurance policy or an annuity policy for a different annuity contract that is better suited to their needs.
According to the Internal Revenue Service, legitimate reasons for making a 1035 exchange can include the following:
- The new annuity may come with a premium and/or a bonus towards the value of the contract
- New features are available on the new annuity that are not included in the current contract
Still Have Questions About an Annuity You’re Considering?
Annuities can be a key component of your overall retirement plan. But these financial vehicles can also be somewhat difficult to understand. So, it is recommended that you discuss your short- and long-term financial objectives before you commit to any type of annuity.
At Annuity Gator, we specialize in educating both consumers and financial advisors about how annuities work, as well as with choosing the right one (if any). If you would like to set up a time to chat with an annuity specialist, you can reach us by calling (888) 440-2468 or by sending us an email to our secure online contact form. We look forward to helping you build a financially secure future.