Like many investment products, tax-deferred fixed annuities have both advantages and disadvantages.
Advantages
- Fixed annuity contracts offer compound growth without anxiety about fluctuations in the stock market
- Income taxes are deferred
- Interest rates are generally competitive
- Proceeds paid to a named beneficiary are exempt from probate
- Proceeds may also be exempt from state inheritance taxes
- You may have the right to take 10 percent (or more) of the account value annually without paying surrender charges (but you are subject to the IRS penalty on withdrawals made before age 59½)
- If the owner has a medical need for long-term care in a nursing home, tax-deferred earnings may be withdrawn, subject to state laws
- Switching to another company can be done without incurring any income tax liability (see Section 1035 of the Internal Revenue Code)
- Values may be transferred from a life insurance contract to a tax-deferred annuity through a Section 1035 exchange
- You may turn the accumulated account value into a stream of income that you cannot outlive, though the amount you receive may be higher using other payout options
- You may take withdrawals at some future date when your personal income tax bracket may be lower than it is during your peak earning years (subject to penalty and surrender charges)
- Depending on your state, account values may be protected from creditors
Disadvantages
- The tax-deferred growth will ultimately be taxed, perhaps to a beneficiary in a higher income tax bracket
- There is no step-up in basis at death, and capital gains tax rates are not applicable, so all income is taxed as ordinary income
- Due to possible surrender charges and IRS tax penalties for early withdrawal, the annuity is not considered a liquid asset
- Ownership by a corporation or any other “non-person” subjects the growth to annual income taxes
- Some surrender charges may last for many years
- Some contracts offer a higher rate of interest if you annuitize and a lower rate if you surrender the contract
- In some states, state premium taxes may reduce the amount of value available for future payments
- Annuities are not federally insured
If you have questions or need assistance, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Disclosures: The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
