9 December 2014 0 Comments

Should You Ever Hold An Annuity In Your IRA?

12-9-14 LII Blog FBThere are two basic types of annuities:  Immediate Annuities and Deferred Annuities.

An Immediate Annuity is used to distribute assets and it has the unique feature of guaranteeing income for life. This guarantee can be over the lifetime of an individual or the joint lifetime of a couple.  Using this contract to distribute income at retirement not only guarantees a competitive yield for life, it also assures the retiree that minimum annual distributions will be met avoiding any penalties.

The disadvantages of immediate annuities are that there is usually no flexibility—once income commences there is no way to accelerate remaining funds—and a savvy investor might want to forgo guarantees for the possibility of earning more through other investments within the IRA tax shelter.

Generally speaking an immediate annuity would only be used at the time retirement benefits are about to, or have, begun.  That said, there is now a hybrid of this policy that defers income for a number of years and then begins the income phase.  If you are considering this be sure to ask what value is received if death occurs prior to commencement of the income?

A Deferred Annuity is used to accumulate assets, so it would be compared with any other investments available for IRA funds.  An annuity purchased outside of an IRA or other qualified retirement plan has the advantage of tax deferral on the earnings.  That, however, is no advantage within an IRA since earnings from any investment are tax deferred.  Generally speaking, deferred annuities make little sense inside of an IRA, especially variable annuities due to their higher expense factors than mutual funds.  There are two exceptions:  If your nature is to be very conservative—or—you have a very short life expectancy.

If you currently have assets in a money market account or bank CD because safety is your primary concern and you are currently earning 2% or less a highly rated life insurance company is likely to offer a substantially higher guaranteed interest rate. Just be aware of surrender charges and don’t get locked into long periods apt to extend beyond retirement.

If you have a short life expectancy some annuities will offer a very high guaranteed rate of return at death with no surrender charge incurred.

And finally…an analysis of the final process.

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