are contracts between individuals and insurance
companies that provide the purchaser with a steady
stream of income during retirement. They often play a
role in replacing or supplementing other fixed income
streams, such as pensions and Social Security.
many financial advisers say it makes little sense to
hold an annuity in a retirement account such as a
traditional or Roth IRA because it would be similar to
wearing a raincoat indoors. One of the main advantages
of an annuity is that your money grows tax-deferred.
However, any asset — stocks, bonds and annuities —
that are held in an IRA is automatically tax-deferred.
it a good idea to buy an annuity within an IRA? At first
blush, the answer would seem to be ‘no’ because one
of the biggest benefits of an annuity is tax deferral,
which you already have in an IRA. But it’s not so
simple," said Ken Nuss, CEO of AnnuityAdvantage, a
national marketplace for annuities based in Medford,
an annuity product meets a client’s needs in the best
way, the fact that you are putting a tax-deferred
product inside of an IRA that already provides tax
deferral is irrelevant," he said.
example is a client who needs to supplement her income
with a five-year fixed-rate investment. She could choose
a corporate bond paying 2.5 percent, a bank CD paying 2
percent, or a fixed annuity yielding 3 percent.
that example, two of the options are not
tax-deferred," Nuss said. "But the
tax-deferred fix annuity provides the best return for
that particular client’s needs."
come in different shapes and sizes. Essentially, how
they work is the investor hands over a lump sum of cash
to an insurance company, which invests the money and
guarantees the annuity owner a stream of guaranteed
lifetime income. The drawback is that once the buyer
enters the contract, he cannot get his capital back and
has little to no ability to change the income stream
once it starts.
are no direct fees associated with fixed-rate annuities.
Variable annuities are a different story. Nuss said he
does not sell variable annuity products.
annuities can potentially lose money and the earnings
rate is not guaranteed. An annual fee for variable
annuities that typically ranges from 1 percent to 2
percent also is charged to the investor’s account,
which acts as a drag on the money that would otherwise
financial adviser Robert Fragasso said he is adamantly
against placing variable annuities in an IRA but has no
objection to fixed annuities as long as the rate is
competitive and the time period of the rate guarantee
commensurate with competitive products.
problem I have is using an annuity as a pension,"
Fragasso said. "You are locking your capital up
forever and you only get a monthly payment. What if you
need the money? What if you or your spouse becomes ill
and you have to self-pay for medical treatment? What if
a child or grandchild needs help and you have locked up
all your capital?
if you have a lifestyle or investment opportunity and
you only have a monthly check?" he said.
"Flexibility with one’s money is a valuable
you annuitize that money and make it a monthly pension,
you’ve lost all flexibility. You can annuitize for
your life and your spouse’s life, and what if the next
day you are both killed in an accident. What do your
kids get? Nothing."
an age where company pensions are going by the wayside,
Nuss said a fixed annuity can be a viable substitute for
those people who have saved enough to purchase a
meaningful retirement income stream.
noted every annuity product has its own minimum deposit
requirement, which typically ranges between $5,000 and
$20,000. Single contribution annuities are best suited
for people who can make a one-time investment large
enough to meet their needs. Flexible premium annuities
allow purchasers to make ongoing contributions until
they are ready for their income stream to begin.
main contradiction to the advice handed down by many
financial advisers is you can’t lump all annuities
into one category and say none of them should be placed
in an IRA account," Nuss said.