Ken Nuss

Annuity myths are harmful because they lead people to dismiss annuities out of hand when they could be a perfect fit.

Myth 1: Annuities are all the same. They’re good only for retirees.

Fact: Different types of annuities are distinct and can help a range of people achieve their financial goals.

Deferred annuities help you build wealth through tax deferral

. They include CD-like fixed-rate annuities, fixed-index annuities that offer growth potential without the downside, and variable annuities, which resemble mutual funds with tax deferral. Earnings left to grow and compound in the annuity are tax-deferred.

provide a guaranteed stream of income for a set period or life. 

A lifetime payout annuity is the only financial product that guarantees income for life. Once payments begin, income annuities usually have no cash surrender value.

Despite their diversity, annuities aren’t suitable for everyone. 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.

Because the annuity market is very competitive, insurers that don’t offer good deals won’t attract many customers.

Variable annuities do have ongoing fees that are deducted from the contract value, and fees sometimes are high. Morningstar Annuity Research Center says annual fees average 1.10% but can go much lower or higher. You can avoid pricier offerings because fees are clearly disclosed in the prospectus.

 consumer fees unless you choose optional rider(s). There’s no sales charge; all the money you deposit goes to work immediately.

The fact that fixed-rate annuities usually pay significantly more than bank CDs with the same term shows that they offer good value. Rates have increased recently.

Income annuities from different insurers produce different amounts of income. To make sure you’re getting the best deal, work with a competent annuity agent who’ll shop the market and give you comparisons from multiple insurers.

Myth 3: Annuities aren’t suitable for IRAs.

Fact: Most types can work well as a traditional or a Roth IRA.

This is one of the biggest myths. One or more types of annuities can be a great choice for IRAs.

A fixed-rate annuity can be a great choice for IRA assets you want to shelter from market risk and earn a set rate of interest. It has a significant advantage over bond funds because they guarantee your principal.

A fixed-index annuity also guarantees principal. It can offer potentially higher rates of long-term return if you don’t mind a fluctuating interest rate.

An income annuity can work well as a traditional IRA. However, your income payments must begin no later than age 72 to comply with required minimum distribution (RMD) rules. If you want to defer distributions past that age, consider a qualified longevity annuity contract (QLAC). It’s a type of income annuity that lets you delay RMDs up to age 85. You can invest up to 25% of your IRA money, to a maximum of $145,000, in a QLAC.

, you can get guaranteed tax-free income for life. Depending on how soon you need income, you can choose an immediate or deferred income annuity.

With the joint-income option, your spouse will receive regular monthly income payments for the remainder of his or her life too. Payments to a surviving spouse are always tax-free, assuming your spouse was the sole beneficiary or your ROTH IRA.

If, however, you want to use your Roth IRA to pass wealth to your children or grandchildren, an income annuity probably isn’t the best choice.

In my opinion, variable annuities aren’t usually a good choice for traditional or Roth IRAs, since you’re paying additional annuity-related fees for tax deferral you already have in an IRA.

Myth 4: Annuities are rip-offs because of early-surrender charges.

Fact: These charges are easily avoidable. Furthermore, most annuities provide some liquidity and flexibility during the surrender period.

If you keep your annuity for the full term, you won’t be hit with an early-surrender charge. If you’re concerned about the length of the surrender period, look for an annuity with a shorter period.

What if you unexpectedly need your money during the surrender period?

First, most deferred annuities let you take a partial withdrawal, typically up to 10 percent of the accumulation value each year, without penalty. Second, you can usually annuitize the contract—turn it into a stream of income—without penalty.

Today, some income annuities let you take out a partial withdrawal before (and in rarer cases after) income payments start. The insurer may also allow you to move up the date for payments.A cash-back option will reimburse your beneficiary if you die before the annuity has repaid your entire premium.

Annuities are meant for money you can afford to set aside for a while and won’t need until 59½. If that doesn’t apply to you, an annuity won’t be a good choice.

Myth 5: Once you buy an annuity, you’re stuck with it.

Fact: There’s a “free-look” period.

Most states require a free-look period that lasts for the first 10 to 30 days after receipt of the annuity policy. If your circumstances have changed or you’ve found a better deal, you can cancel the contract and the insurer will return all your money. You won’t, however, earn any interest on the canceled policy.

While it’s unlikely you’ll use the free-look provision, it provides peace of mind.And occasionally, it can be valuable.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.

Ken Nuss

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