Who should have an Annuity?

Annuities, both fixed and variable, are tax deferred investment options which yield higher returns than traditional retirement plans, but with less of a risk than that faced with a direct investment in stocks and mutual funds. Annuities are particularly beneficial under a certain set of circumstances and for certain professions.

Risk Averse Investors or Retirees

For those recently retired, or about to retire, a risk free and secure future, with a guaranteed ability to meet payments, is often a high priority. With burgeoning costs and employers not willing to take responsibility for retiree benefits, the fear that you may run out of capital sometime in your old age is a prime motivator to consider buying an annuity, which provides a guaranteed income stream, even if you outlive the investment. The flip side is that if you pass away early, the insurance company which issued the annuity gets to keep the money. Thus, an annuity is a worthwhile investment for a retiree who wants a guaranteed income stream, accepts little or no financial risks and expects to live well into the future.

Safety from Malpractice

If your profession carries a high risk of being targeted by malpractice lawsuits, you need to make investments which are protected from creditors. Thus, physicians, lawyers, CPA’s and other professional consultants can look upon annuities as a safe harbor for docking funds with the additional advantages of tax deferral and a secure future, regardless of the state of their practice.

Stock Traders

If you trade stocks from a taxable account, you are liable for capital gains tax of up to 35%. Annuities offer a way to trade and keep the contributions and gains tax deferred. But it can take up to 20 years for the benefits from this tax deferral to exceed the 15% long-term capital gains tax applicable. You would also need to factor in the tax bracket you fall into at the time o withdrawal. Investors looking at this particular advantage should consider annuities which offer a lot of flexibility including switching investments, attractive sub-accounts and minimum or no surrender values. Please note that the IRS still imposes a 10% penalty on early withdrawals.

Balancing Insurance Losses

Underwater life insurance policies are generally not tax deductible. However, if you transfer the policy into an annuity, the losses can be balanced against the gains in an annuity.

This is obviously not meant to be an exhaustive list of what type of person (or investor profile) would benefit from owning an annuity. As with any financial decision, we recommend you speak with a qualified financial professional for more detailed information as it pertains to your specific financial situation.