(1) A deferred annuity is the only asset you can own that does not get a “step-up in basis” at the time of your death. Real estate and stocks could appreciate and be passed on to heirs upon the death of the owner with no income tax whatsoever. But an annuity does not enjoy this tax feature. Specifically excluded from the step-up in basis rule, the entire gain in the annuity is subject to income tax (and regular income tax rates to boot) when received by the beneficiary.
So, if you want to pass on your savings at death, a life insurance policy rather than an annuity would be a better choice and are paid to the beneficiary income tax free. Stocks and bonds get a step-up in basis, minimizing taxes since there would be no gains if sold immediately, and are another good choice to pass on a financial legacy.
(2) Annuities are not FDIC insured. They are not deposits, obligations of or guaranteed by the bank or any federal government agency.
(3) Annuities involve risk, including the possible loss of principal. All guarantees are subject to the claims paying ability of the insurance company you use. There are state guarantee programs and, in Virginia, the first $100,000 is insured. This is a good idea to keep each annuity below the state guarantee amount.
(4) For retirees, particularly older retirees, deferred variable annuities can be a financial disaster. Why? Because they require a cash outlay late in life without the guarantee of certain returns. Early-withdrawal penalties and surrender charges could limit a retiree's ability to access cash in a pinch (though I will discuss in later posts the guaranteed withdrawal benefits of the latest iterations of annuity products). Much of the controversy surrounding variable annuities has focused on their sale to older people.
A "sweet spot" for considering annuities is probably in the age 60 - 75 range, if at all appropriate.
(5) Fixed income payments from an annuity may not keep pace with the rising cost of living. This is quite important and the cost of an inflation rider may not be worth it. You might be better off keeping other money aside (that is why no more than 25% of your total portfolio should be commited to annuities) that can grow. This will allow you to purchase another annuity years later to help provide the inflation boost you may need.
There are many advantages of annuities, too, to be in a future post.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.