Contribute the maximum-allowable annual amounts to any pre-tax retirement accounts for which you qualify (Keogh, 401k, 403b, etc.).
Step2
Contribute to individual retirement accounts (IRA) for you and your spouse.
Step3
Pay off all consumer debt.
Step4
Calculate the adverse financial impact of your death on your family and purchase adequate life insurance.
Step5
Make sure that you have adequate savings for emergencies and projected expenditures.
Step6
Purchase an annuity only if you still have disposable and increasing reserves that are being taxed year after year, even after taking care of all of the above needs. (See Glossary for a more comprehensive definition of "annuity.")
Tips & Warnings
It is advisable to have gone through the process of producing a comprehensive financial plan before purchasing an annuity.
Interest and capital gains in an annuity, under current tax laws, do not have to be reported on your income tax return.
Many annuities provide limited, penalty-free withdrawals for long-term care or personal emergencies.
Withdrawals can also be taken without a company-penalty for income purposes, within contract limitations.
While modern annuity contracts have a number of features and investment options, remember that they are financial instruments created primarily for retirement income purposes and are treated as such by the IRS.
If you surrender funds or make a major withdrawal from an annuity before you are 59 1/2-years-old will subject you to IRS penalties.
The insurance company underwriting the annuity may also impose significant back-end charges for surrendering or withdrawing amounts from a recently purchased contract.