Immediate vs. Tax-Deferred Annuities: Understanding the Difference
Where fixed annuities provide a fixed rate of return on the underlying principal, a variable annuity, as the name implies, pays a varying rate of return. Variable annuities are attractive because they allow investors to realize greater returns, but also carry greater risk. If you have been considering purchasing annuities as part of your financial planning, Alpha Crypto Consulting founding Kris Montgomery can help you decide whether variable annuities are right for you.
Variable Annuities Explained by a Financial Advisor
The rate of return on a variable annuity will depend on the performance of the underlying investment portfolio chosen by the purchaser. There are two elements of a variable annuity that will determine its value:
- The principal investment, or the amount you paid into the annuity; and
- The rate of return on the underlying investments.
Variable annuities aren’t for everyone, and fixed annuities are a better choice for many investors. Kris can help you understand the products available and help you make an informed decision.
Deferred or Immediate?
Variable annuities can be both deferred or immediate, which means that the purchaser can fund the annuity over time by paying premiums (referred to as the accumulation phase) or can be purchased with a lump sum and begin receiving payments right away.
Variable Annuity Risks
While variable annuities do offer greater possible growth than fixed annuities, there is also greater risk. Because the annuity is tied to an underlying investment portfolio, there is always risk of losses. For this reason, most people choose deferred annuities and treat them as long-term investments.
About Variable Annuity Fees
Annuities are generally used for retirement purposes, meaning that people generally pay into them and do not withdraw any funds until the payout phase. They are generally less liquid than other types of investments, and variable annuities are subject to a 10% tax penalty if you make a withdrawal before you are 59 and ½ years old.
Most variable annuities allow one withdrawal per year during the accumulation phase. That said, you also need to be aware of any “surrender fees” that you may have to pay. These are fees that are charged during the “surrender period,” which can be as long as 15 years. Surrender fees can be substantial, so it is important to understand what may be charged and consider your future needs before purchasing a variable annuity. Kris can review these fees with you, discuss the potential advantages and disadvantages so that you can choose the best option for you.
Considering a Variable Annuity? Alpha Crypto Consulting Can Help
Variable annuities present tremendous opportunities for those who are looking for greater returns than those offered by fixed annuities. However, it is important to go in with your eyes open and give careful consideration to your future needs. With over 10 years of financial planning experience, Kris provides personalized, one-on-one guidance focused on your financial goals. To discuss how annuities can serve your goals, call or email Kris to begin a conversation.