Welcome back to another Intentional Money Matters segment with the Better World Podcast. Caleb is here with Harry Stout to discuss some of the drawbacks of fixed annuities. Whether you're considering incorporating annuities into your retirement plan or just wanting to understand more, it's crucial to be aware of both the benefits and the potential downsides.
Understanding Annuities
Annuities are medium to long-term financial vehicles, not designed to function as checking accounts with instant access. If you're considering an annuity but anticipating needing all the funds in the short term, it might not be the right choice for you.
Drawbacks to Consider
- Interest Crediting Restrictions:
Often, the declared rate of interest on a fixed annuity is for one year, but the product may have surrender charges spanning five to seven years. To ensure you're making an informed decision, ask for the annuity's renewal history and how their rates have changed over time.
- No Capital Gains Benefit:
While annuities enjoy tax deferral, any appreciation is treated as ordinary income, not capital gains.
- Bonus Interest Rate Offers:
Some products offer a first-year bonus rate, but there may be strings attached, such as staying with the company for a certain period or choosing specific annuity streams. Always clarify the conditions attached to such bonuses.
- Limited Liquidity:
Annuities often come with surrender charges which limit access to cash. While some provide a 10% free withdrawal annually, unexpected life changes can make these restrictions burdensome.
- Early Withdrawal Penalties:
Withdrawals made before age 59 incur a 10% penalty, thanks to Federal regulations. While there are exceptions, consult a tax advisor for detailed guidance.
Conclusion
While annuities can be a useful financial tool, it's crucial to understand their intricacies, potential limitations, and ensure they align with your financial goals. Always have a portion of your assets in liquid form to manage unforeseen emergencies effectively.