Is an Annuity Right for You?
Consider your age, income, financial situation, and debts before buying an annuity. The following guidelines can help you decide whether an annuity is right for you:
- If you are retired, an annuity is probably not a good option because it can take many years for an annuity to become profitable. If you want to use an annuity to provide retirement income, it’s best to buy it at least five to 10 years before you retire.
- If you do not have any other investments or savings accounts, an annuity is probably not a good place to start. It’s a good idea for investors to have some investments that can be converted to cash in case of an emergency or other need. You usually have to pay a penalty – often as high as 25 percent – if you withdraw your money from an annuity early.
- If your goal is to have a guaranteed income stream for retirement, annuities that make fixed monthly payments for the remainder of your lifetime can be a good option.
- If you have the financial discipline to keep your annuity for a long time, it can be a good option. But it’s not if you want or need to cancel it after only a few years. You’ll not only have to pay a penalty for cashing in early, but it will probably increase your tax obligations too.
- If you’re in a high-income tax bracket now, but expect to be in a lower tax bracket in the future, an annuity can be a good choice because earnings are tax-deferred. This means an annuity’s earnings aren’t taxed while they grow. They’re only taxed when you actually make a withdrawal or receive a payment. If you contribute to an annuity while you’re in a high tax bracket and receive payments while you’re in a lower one, you will probably pay less in taxes than you would with other investments.
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