How to Know if an Annuity Is Right for You

If you have disposable income that is being taxed, you may want to purchase an annuity as a savings shelter.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Financial Calculator
• Brokerage Accounts
• Paper And Pencils

1. Contribute the maximum-allowable annual amounts to any pre-tax retirement accounts for which you qualify (Keogh, 401k, 403b, etc.).
2. Contribute to individual retirement accounts (IRA) for you and your spouse.
3. Pay off all consumer debt.
4. Calculate the adverse financial impact of your death on your family and purchase adequate life insurance.
5. Make sure that you have adequate savings for emergencies and projected expenditures.
6. 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.