Solomon Success is not a big fan of investing in annuity benefits for the alleged tax advantages because the same result can be derived elsewhere without giving your financial planner such a large slice of the pie. Most investors first run into the annuity “scam” when they meet with their insurance agent, who suddenly becomes obsessively fixated on the idea that you should purchase an annuity for tax free money in your retirement years.
Good idea? Only if you happen to own stock shares in the company selling the annuity. Here are the facts the agent will use to butter you up for his most common recommendation, the tax deferred annuity. In this case you either pay a chunk of money up front or in a series of installments. Your investment will then continue to grow without the IRS getting its dirty little fingers on it until withdrawal. Your gains become regular income during old age.
The preceding description sounds suspiciously like an Individual Retirement Account (IRA). Hmm, now that we stop and think a moment, it sounds EXACTLY like an IRA. The only difference is you will be charged a much higher administrative fee/commission to set up and maintain it. Sounds like a good idea? Only if you”re the guy selling it.
Motley Fool mentions the following as reasons to steer clear of investing in annuity benefits.
1. Annuity payouts are taxed as ordinary income. IRA stock or real estate investments will be taxed at the lower capital gains rate if you hold onto them long enough.
2. They have weird fees. A fee-only nbso online casino planner or Vanguard-style index fund costs much less because they don”t include such line items as “mortality and expense charges.” In our view, this is nothing more than an insurance industry attempt to pad the bottom line. Commissions earned by the agent on an annuity regularly reach 7-8% and often go as high as 15%. Mutual fund IRA”s cost about 3-4%. Think your agent wouldn”t rather sell you an annuity?
3. The life insurance isn”t that great, a philosophy agreed upon by Fortune magazine.
4. Fixed annuities tend to invest in assets that might not even keep up with inflation. Your guaranteed rate of return is dangerously low.
This last feature really sticks in our craw when it comes to making smart financial moves. By tying your money up and investing in annuity benefits, you reduce the cash available to make investments that will likely yield a far superior rate of return.
The Solomon Success Team
Flickr / homesbythomas
