|
They do have their place but they are often misrepresented.
The big advantage to them is that the investments grow tax-deferred until you take the money out. A nice enough benefit, but because of the higher internal fees for the annuity, you need to keep your money in there for several years before you save enough in taxes to make up for those fees. Plus, when the $$ comes out, it is taxed as ordinary income as opposed to long term capital gains treatment of stocks or mutual funds. So again, you need to have the money in there for a long time to compensate for the difference in tax treatment.
Some variable annuities come with special guarantees - for instance, that you will be able to get back all of the money you put into the annuity, even if the stock market drops. Others out there guarantee that you will be able to withdraw a certain % of the account forever, even if the stock market drops. These guarantees are relatively new and pretty much untested . .. and they are also expensive. It's a pretty good deal for the insurance companies, who are betting that there won't be a prolonged downturn of the stock market and that they won't have to actually deliver on their guarantees.
If you annuitize an annuity - or if what you purchase is an immediate annuity - so that you are getting a stream of income from the insurance company - you are in essence giving the insurance company a large sum of money in order to guarantee that you receive income for the rest of your life. By giving up that large sum, you lose your flexibility with it - once you purchase the contract, it belongs to the insurance company and you don't get it back. Most of the time, the payments you receive are fixed, so over time they lose pace with inflation. I would rather keep the large sum of money and invest it in a diversified portfolio than give it to the insurance company!
Unless you are specifically looking for the special guarantees that variable annuities can offer - you want to avoid investing an IRA in one. Your IRA already gives you tax deferral, so you aren't accomplishing anything by having the annuity - but you ARE increasing your expenses.
At the risk of offending life insurance agents, I would talk to a professional who is able to offer other suggestions before making a final decision on an annuity.
|