A diverse retirement portfolio is comprised of a variety of options for investment management, like 401(k), Roth IRA, real estate, cash savings, and more. Many people rely on their annuity as part of their retirement strategy but they may not know all the ins-and-outs.
Annuities were designed to be a reliable means of securing a steady cash flow during retirement years and to alleviate the risk of outliving one’s assets. While they may seem like solid investments, there are some things that may have you questioning them further. Here are six things you may not know about your annuities.
If sold by a broker, there is typically a 6% commission on an annuity resulting in a 10-year penalty period, starting at 10% and reduced 1% annually. These commissions explain a lot as to why brokers may suggest annuities even when they may not be the best investment option for their client.
The fees on an annuity can be high. That includes mortality and expense charges, surrender charges, and management fees. These fees can swallow a chunk of your investment, reducing your payout. Make sure you know exactly how much you’ll pay for fees and make sure to shop around for a low-cost option.
The maximum that can be taken in a given year during the penalty period is 10%. They often have terms of 10 years or more, and if you choose to withdraw your money before the term period is up, you can be faced with a hefty penalty. Make sure you know the term limits before you sign.
All earnings with an annuity are eventually taxed as ordinary income. There are no capital gains. If you were hoping to have some sort of tax benefit, look elsewhere. When your annuity starts dispersing payments, it’s taxed as ordinary income and not capital gains.
When the owner passes away, there is no step-up in cost basis to current market value of the assets. Any deferred income will be taxed as ordinary income at your beneficiaries’ tax rates.
If you’re considering annuities as part of your retirement portfolio, consult with a financial adviser first to make sure it’s the right option for you.
The result is that the ultimate beneficiary is given a tax bill after the owner passes away.
Caldwell Trust Company is an independent trust company with offices in Venice and Sarasota, Florida. Established in 1993, the firm currently manages over $800 million in assets for clients throughout the United States. The company offers a full range of fiduciary services to individuals, including services as trustee, custodian, investment adviser, financial manager and personal representative. Additionally, Caldwell manages 401(k) and 403(b) qualified retirement plans for employers.