When a lot of people look for safe stable investments, they think to buy annuities. However, we have been hearing a lot of negative information annuity information lately, so before you buy an annuity, those of us here at Peak Personal Finance thought we should examine this decision a little more closely.
Specifically, we have heard some people talking about the negative aspects of variable annuities. For those new to annuities, an annuity is an insurance-related investment vehicle that allow tax deferred investment growth without the dollar limits of IRAs or 401(k)s — but early withdrawals can trigger tax liability and a ten percent penalty. That sounds good so far, but what’s bad about variable annuities? Here’s a list:
1. First and foremost, high annual fees can add a tremendous amount of cost to Variable Annuities — possibly up t 4% annually. And that commission is on top of the management fees already built into the mutual funds a variable annuity invests in.
2. Most annuities charge high surrender fees should you decide to withdraw your money before a certain period of time (often 5 years) has passed. These surrender fees can be as high as 12% .
3. Annuity income is usually taxed as ordinary income (up to 35%), and not as long term capital gains income (15%) as most mutual fund income is taxed. That’s a lot more for Uncle Sam (and a lot less for you!).
4. Although many annuities “guarantee” a rate of return, those guarantees only as good as the insurance company making them. With the nation’s largest insurance company (AIG) coming close to bankruptcy recently, you might not want to place to much reliance on such guarantees.
So, with all of this down-side, why are there so many financial advisers hawking variable annuities? Annuity sales can be highly lucrative for the annuity provider (possibly around 5% initially, plus commission on annual fees), so there can be an incentive for an annuity purchase to be vigorously pushed upon you.
O.k., so what do you do if you’ve already been sucked into buying a stinker of an annuity. You might consider a 1035 exchange to another annuity with a lower annual fee. 1035 refers to the section of the tax code that essentially lets you exchange one annuity for another without recognizing tax (or withdrawal penalties) on the trade. There are some annuities out there with much lower annual fees than 4% (some less than 0.5%), so when you do the math it could be worth the early termination penalty to switch to a lower annual fee annuity if you have several years left. Be sure to consult with a trustworthy accountant or financial advisor before making a decision.
Dear Peak Blogger,
You’ve done a great job here outlining the issue surrounding typical variable annuities, and the fees that can ruin otherwise great returns that investors may be able to earn.
At Jefferson National, we’ve made it our mission to help Americans save more for retirement by launching Monument Advisor, the first variable annuity with a Flat-Insurance Fee and a supermarket of more than 200 tax-deferred funds.
Variable annuities are an excellent source of more tax-deferred savings. The controversy with VAs has always been cost, complexity and limited investment choices. Our Flat-Insurance VA goes right to the core by cutting costs and commissions to help investors accumulate more, and arming them with 5x more fund choices to navigate today’s volatile markets.
It is estimated that variable annuity owners are paying more than $14 billion dollars each year in excess insurance fees alone. Many of your readers may be paying more than they should. We encourage them to take our challenge at , comparing their current VA against our Flat-Insurance Fee VA to see how much they can save and how much more their savings will grow. Our site also allows them to learn from industry experts and their peers, read success stories, and access a range of resources that can help them to maximize their retirement savings.
We often write articles on important financial topics, such as maximizing tax deferral and increasing tax efficiencies by using a Flat-Insurance Fee VA. If you believe these articles will be of value to your readers, we will send them to you for posting on your blog.
I thank you for your time and look forward to having an ongoing dialogue. If you have any questions, or if you would like to speak with or one of the many clients who are saving more by making the move to our Flat-Insurance Fee VA, please don’t hesitate to contact me at
Best Regards,
Dan Sommer
Jefferson National
212-699-6401
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