Opponents of having an annuity inside an IRA point to a simple fact that the IRA account is already tax deferred and say, “what’s the point?” Some proponents of an annuity inside an IRA agree that the annuity does not add anything to the tax treatment of the IRA, but go on to state that annuities can add value and argue that the tax treatment is “beside the point.” We believe that there are some very specific uses of annuities that can enhance a client’s need for income and desire for guarantees. We key on two unique characteristics of an annuity contract.
The first characteristic we have identified is risk transfer. Clients with a limited amount of money can transfer the risk of outliving their money to the insurance company. The unique ability of an annuity contract to provide an infinite payout distribution over someone’s lifetime based upon a finite premium deposit, even if the payout is much greater than the original premium, is worth paying attention to. The specific type of annuity contract that is best able to deliver this characteristic is a Single Premium Immediate Annuity (SPIA). A SPIA is the only investment vehicle that can guarantee investors that they will not outlive their income stream. The secret to why this can be so attractive is that the client can “invade the principle” without fear that they will run out of money. A portion of each payment is principle and a portion is interest and the insurance company bears the risk having to payout more than the original deposit. There are even payout options available that allow individuals the ability to protect their beneficiaries from the risk of a premature death and inflation. The search for the best available SPIA can be as simple as finding the highest “rate of distribution” from the highest rated insurance company. If the client has medical issues, some insurance companies will even increase the payout based on poor health. As stated earlier, a 10% or better guaranteed “rate of distribution” is worth paying attention to.
The second characteristic that we believe is important when considering an annuity option inside an IRA is the guarantees. The fixed and indexed annuities have guaranteed protection of the original principle that is provided by the insurance company and established at the outset of the annuity contract. This means that the client can at least feel at ease knowing that they will get back their original investment plus interest. Additionally, annuities can have very attractive guaranteed rates of return when compared to other fixed-income instruments, like CDs and money market accounts. A thorough review of the financial strength of the insurance company backing the guarantees has to be a big factor in determining which product to ultimately use.
We do not believe that all annuities are appropriate for an IRA. By the same token, there are some scenarios where an annuity can make sense in an IRA.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. 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.
