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Annuities no target month

Lately I’ve been getting a lot of questions about annuities. Are annuities really as safe as claimed? How much do annuities pay? Are they tax free? Can I use a loss in my variable annuity to reduce my taxes? Can a tax sheltered annuity from a school be rolled into an IRA? Should I change my IRA from the stock market to a fixed interest rate annuity? Here are my opinions, in 500 words or less:

Annuities are fairly safe, but they exist in many varieties and most have two parts: the first part is an accumulation phase where money builds up tax deferred until you need it and the second is the annuitization phase after you have retired and you take monthly checks as extra income. The annuitization phase is very safe: once you and a solid insurance company sign an agreement to start your monthly payments, those payments are guaranteed by the company (though not the government). The general track record for safety of such payments is excellent.

How much annuities pay during the accumulation phase varies widely, depending on the policy. Some companies offer traditional fixed annuities that pay perhaps 5 % subject to new rates at renewal time, something like a bank’s Certificate of Deposit, but tax deferred, not FDIC insured and usually subject to greater early withdrawal penalties. These don’t sound too bad these days. During boom times, many annuities were sold that "paid" according to the stock market or even a specialized part of the stock market that you can select. Like some stock mutual funds, the values of some of these annuities went way up and then way down. So the growth of an annuity during its accumulation phase depends on whether you select one that resembles CDs or one that resembles the stock market. Annuities have a modest death benefit guarantee: if you should die during the accumulation phase, the insurance company will generally guarantee that your heirs will get at least as much as you invested, with no loss.

How much annuities pay during the retirement payout period is usually not disclosed. The insurance company instead focuses on how long it will probably have to send you those monthly checks (usually your remaining life expectancy), how much the insurance company thinks it can earn on investments and what its operating costs and profit will be. The result is usually quoted to you as a monthly payment, without the detail describing their internal calculations. For new policies get several quotes.

Annuities are tax deferred rather than tax free, something like a traditional IRA in that you pay no tax on what’s earned inside the annuity, but you pay income tax on the earnings when they are paid out to you. The return of your original investment is not taxed, only the earnings. Each retirement monthly payment therefore is usually partly tax free return of principal and partly taxable earnings.

Can I use a loss in my annuity to reduce my current taxes? No. Whatever happens inside an annuity (or inside an IRA) is separate from your current income tax situation. You could perhaps cash it in prematurely for a useable loss, but that seems extreme. Can I roll a Tax Sheltered Annuity (which is like a company IRA retirement plan for teachers and other non profit employees)? Yes, consult current updated rules.

Should I change my IRA in the stock market to an annuity that offers company guarantees and fixed interest rates? That’s too difficult a question. It’s like asking whether you should trade in your Buick car for a Toyota pickup. It depends greatly on your intended purpose. In both cases be aware that significant sales charges or trade in costs could apply. Perhaps the dealer that you bought it from can offer you a less expensive trade-in option.

Annuities are financial tools that fit some situations, particularly for retirees who want monthly income guaranteed for as long as they live. Note that such payments include the return of principal and hence usually nothing will be left in the annuity for heirs to receive. Charitable Gift Annuities are designed so that something is left for a charity’s use, which can give a person an immediate tax deduction (often significant relative to Montana income tax). Much flexibility exists in the selection of annuities.

My quick and very crude answers omit many important details and every person’s situation is different. Therefore please use these just as starting discussion points as you consult an insurance agent or other financial advisor for more complete and relevant answers.