Why are annuities popular?
Annuities are generally sold as a way to accumulate assets for retirement (with taxes deferred until money is withdrawn), and/or as a convenient method for delivering income during retirement. They generally come highly recommended by sales agents due to the large commissions the agents receive.
Does Henssler Financial recommend use of annuities for our clients?
No. We recommend maximizing contributions to qualified retirement plans, annual IRA contributions, and investing additional funds in individual, common stocks, or high-quality fixed income securities, depending on when funds are needed from the portfolio. Holding stocks defers capital gains until the stocks are sold, and portfolios can be structured to pay high dividends or low dividends, depending on the need for income. Tax-efficient equity mutual funds are also an effective way to save funds on a tax-deferred basis. Also, remember that stocks’ cost basis is stepped up at the death of the owner, while annuity values are not stepped up. Often, the annuity value, or a portion of it, evaporates at the owner’s death.
Be aware of annuity expenses. The average variable annuity insurance annual expense is over 2% versus 1.4% for mutual funds. In addition to the annual expense, other annuity costs may include: front-end loads, surrender charges, commissions paid to the selling agent, state premium tax, or an annual flat charge.
Tax deferral may not be worth what you think. When you take distributions from an annuity, a portion of the distribution may be considered a return of principal, while the remainder is taxed as regular income (maximum rate of 35%). Every distribution you take is taxed based on pre-determined rules, allowing you little flexibility in determining when to pay taxes. However, in a stock portfolio, you can decide whether or not you wish to sell stocks with large gains or losses, and therefore better control when you pay taxes on your gains. Long-term capital gains are currently taxed at a maximum rate of 15% (5% if you are in the 10% or 15% tax brackets).
Should I sell my annuity if I already have one?
Review your annuity contract and other relevant financial information with your financial planner. Items to consider include: declining surrender charge, possible 10% tax penalty on withdrawals, annual expense fee and investment alternatives. If you have an annuity with large fees and gains, you may elect a 1035 Exchange for another annuity. Charles Schwab & Co., Inc., The Vanguard Group, and Fidelity Investments Life Insurance Company all have low priced annuities with no surrender charges. If you have an annuity with large surrender charges, you may wish to hold the annuity, make sure it is invested in fixed-income securities, and use the proceeds to cover liquidity needs through distributions.
How much are fixed annuities currently paying out?
You can check out current fixed annuity returns using websites:
For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or [email protected].