WHO BUYS DEFERRED ANNUITIES AND WHY?
Deferred annuities can be a great investment choice for retirement planning – especially if you start investing early. Unlike Individual Retirement Arrangements (IRAs), there is no annual limit on the amount of money you can invest in a deferred annuity. Therefore, investing in a deferred annuity can be a good way to boost your retirement savings once you’ve made the maximum allowable contributions to your IRA.
Deferred annuities allow your money to grow tax deferred until you withdraw it. The deferred annuity can be used to create a guaranteed stream of income during your retirement years and the taxes you pay on your earnings will be spread over a period of years. This does not reduce the amount that you will ultimately owe, but it does make the tax burden more bearable.
Deferred annuities can come with unpleasant surprises however. And those surprises usually come when your heirs inherit a deferred annuity from you.
WHAT HAPPENS WHEN YOU PASS A DEFERRED ANNUITY ON TO HEIRS?
Unfortunately, a deferred annuity is the only asset you can own that does not get a “step-up in basis” at the time of the original owner’s death. Real estate and stocks that have been owned for years and appreciated ten to one hundred fold can be passed on to heirs upon the death of the owner with no income tax whatsoever. But an annuity does not enjoy this tax advantage. With deferred annuities, the entire gain is subject to income tax when received by the beneficiary.
In fact, it is not uncommon to see proceeds from a deferred annuity that was accumulated in a relatively low tax bracket (15% or 20%), incur taxes of 33% or more when added to the existing income of the beneficiary. This clearly was not the intent of the contract owner. It occurred because the owner failed to consider all his investment options and choose the most appropriate strategy. Don’t let this happen to your loved ones.
SHOULD YOU CONTINUE HOLDING AN ANNUITY IF YOU ALREADY HAVE ONE?
That depends on the type of annuity it is, your circumstances and the circumstances of your heirs and family members. Some people benefit by having an annuity for a while and then reach a point where a lump sum of cash seems preferable. Perhaps you would rather help your children with the down payment for a home. Perhaps your own home needs urgent, expensive repairs.
Only you can determine whether deferred annuities are right for your financial situation. If you feel you might benefit from selling your annuity for a lump sum of cash but would like more information, just fill out our simple form or call 800-306-9841.
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