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Get the Inside Scoop on Annuities

Annuities are financial products sold by insurance companies that allow you to put aside money, have it increase each year without paying taxes and then trigger a stream of future payments on a timetable you can control. Unlike IRAs, there’s no income limit on how much you can place in an annuity.

By being in a pool with other annuity customers, insurers can offer attractive returns. Those who pass away at younger ages effectively subsidize more attractive income streams and benefits for longer-lived annuity holders.

There is a whole range of products labeled annuities, and some are much better than others are. You need to be really careful before you jump in. Although annuities are heavily sold, they are not right for everyone. Even if they are appropriate for you, it’s important to pick the right kind.

Know the Basics

If you’re worried that you might outlive your savings, consider an annuity. They can come with an array of features, such as:

And what if you want to get rid of an annuity you no longer want or need? You have several options that depend on three things:

Tax and Finance Implications

Note that generally, if you own the annuity inside an IRA or other retirement account, you can cash it out and reinvest the money without a tax hit as long as it stays in the account. Any money that you withdraw from a retirement account (other than a Roth IRA) is taxed at your regular income tax rate. If you own an annuity outside a retirement account and cash out, you will typically owe taxes on any earnings at your regular income tax rate, not the lower capital gains rate reserved for most other investments. The part of the payout that represents a return of your initial investment would be tax-free.

Annuities have life insurance protection, frequently guaranteeing that you never receive less than what you paid in. But financial planners caution that the rate of insurance company management fees and charges should be carefully reviewed and understood.

Also be aware of:

You can tailor an annuity to meet specific timing, family and retirement needs. Make sure you understand exactly what’s entailed in the plan you choose—all the insurance charges, fees and conditions that may govern subsequent decisions you might need to make.

When you buy a retirement annuity, it’s vital to consider the financial strength of the insurer.

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