• Alex Kreis

The Truth About These 5 Common Annuity Myths

Annuities are a financial vehicle that is often dismissed due to a handful of common myths. We’re here to clear those up!




1. Annuities are all the same.

There are different types of Annuities to help achieve a range of financial goals. The two main types:

  • Deferred Annuities, which can help you build wealth through tax deferral

  • Income Annuities (immediate and deferred), which can provide a guaranteed stream of income for a set period or for life

Of course, Annuities are not suitable for everyone as each person’s financial situation is different. Consult with a Financial Advisor to find out which Annuity is right for you.


2. An Annuity is pointless if I already have an IRA.

Annuities provide tax-deferred growth just like IRAs, providing additional benefit to using Annuities for tax qualified retirement assets. They also possess features that standard retirement accounts sometimes lack such as growth at a certain rate, lifetime income payments, and lock in death benefit.


Other advantages annuities add is that Fixed-Rate Annuities and Fixed-Index Annuities guarantee your principal. Both have their advantages and disadvantages

On the other hand, an Income Annuity can work as well as a Traditional IRA. By using an Income Annuity to fund a Roth IRA, you can get guaranteed Tax-Free income for life


3. All Annuities have high fees/charges.

Given that the Annuity market is very competitive, this is not true. Typically, annual fees average 1.10% but can vary over a large range. Fees are also clearly disclosed in the prospectus, preventing you from feeling as though you are out of the loop. Fixed Annuities have no consumer fees while Variable Annuities have ongoing fees that are deducted from the contract value. Remember, shop around the market for income annuities as there are a range of options.


4. Annuities are not worth it because of surrender charges.

While many Annuities do have significant surrender charges, there are several ways funds can be available to you. Annuities typically offer a free withdrawal amount that is generally a stated percentage of your contract value. This amount is typically free from surrender charges.


Likewise, withdrawals are commonly free from surrender charges if you have nursing home expenses, are diagnosed with a terminal illness, or need to satisfy IRS-imposed required minimum distributions. Keep in mind that surrender charges generally don’t last forever. Their terms will vary by contract, and they typically decrease over the years until they no longer apply.


5. Annuities are only good for retirees.

Part of the reasoning behind this myth comes from the fact that if you withdraw or receive earnings from an Annuity before age 59½, you’ll be hit with a 10% IRS penalty along with regular income tax.


However, deferred annuities are common when saving before retirement. Further, with pension plans no longer being a standard offering for employees, annuities can help create a lifelong income stream


Sources:

1. https://www.medicaleconomics.com/view/five-annuity-myths-that-can-blind-you-to-good-financial-options

2. https://www.westernsouthern.com/learn/financial-education/annuities-explained-5-myths-debunked


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