Annuities have become more popular over the years as a means to generate a guaranteed stream of income, either for a set period of time or even for the remainder of one’s lifetime, regardless of how long that may be.
Depending on the annuity, you could also attain other benefits, too, such as tax-deferred growth, a death benefit, and/or penalty-free access to funds in the account in the event of a terminal illness diagnosis or the need to stay in a long-term care facility.
But even so, many consumers and financial advisors alike have shied away from these financial vehicles due in large part to their fees.
Annuity Fees versus the Cost of Other Investments
Although it may be hard to tell, most investments and other financial vehicles will have some type of “charges” required for you to own them. For instance, investments like stocks and front-loaded mutual funds will oftentimes deduct a sales commission at the time of purchase.
Likewise, bonds and certificates of deposits may have an early withdrawal penalty if you opt to cash out of the investment before its stated maturity date. Even money market accounts, which are touted as being “free,” may require you to maintain a minimum balance or otherwise be charged a fee.
The same may hold true with certain annuities. While these insurance contracts have long been criticized for their excessive charges, the reality is that certain types of annuities – primarily fixed and fixed indexed – may not have any fees at all unless you cash out some or all of the account value “early.”
Based on the particular annuity – as well as the duration of the surrender charge period – you could incur taxes on any gain (as well as pre-tax contributions) that you withdraw, as well as a surrender charge, and/or a 10% IRS “early withdrawal” charge.
Generating a profit with many other types of investments could also result in a taxable event, though. Based on how long you held the investment, you may be taxed at either the long-term capital gains rate (if you owned it for more than one year), or alternatively at your ordinary income tax rate for investments that were held for one year or less.
There may also be a surrender charge involved if you either cancel an annuity or you withdraw more than a set maximum amount each year during the surrender period. This, however, is similar to other financial vehicles that may also penalize you for terminating before a preset maturity date, such as:
- CDs (certificates of deposit)
- Cash-value life insurance
- Some mutual funds
For instance, selling a bond early will usually negate the guaranteed return of your initial investment – and if the value of the bond has gone down when you wish to cash out, you could actually incur a loss of principal.
Mutual funds may also charge you if you sell your shares before a set time period has elapsed. While some charge a sales commission up-front – which reduces the amount of money you have going to work for you right off the bat – others will hit investors with a back-end load.
This works in a similar manner as an annuity surrender charge in that the percentage of the penalty will typically be reduced over time until it eventually disappears. In addition, unlike most bonds and CDs, most annuities will still allow you to access up to 10% of the contract’s value penalty-free – even during the surrender period.
Are You Ready to Narrow Down the Right Annuity for You?
With ways to reduce or avoid the fees that you pay on annuities, these financial tools could be a good addition to your portfolio. In order to determine whether or not this is the case, though, it is recommended that you discuss your short- and long-term objectives with an annuity specialist.
At Annuity Gator, we’re here to help with answering any questions that you may have about annuities and to compare different products in order to decipher which – if any – may be right for you.
So, feel free to contact us directly by calling (888) 440-2468 or by sending us an email to our secure online contact form. We look forward to helping you navigate your way towards the right financial strategies for your needs.