As it gets closer to the time of retirement, many investors start to look at where to put the money they have been saving for retirement. If the purpose of this money is to supply income during retirement, then you want to look closely at your options.
Many investors are often sold annuities as the solution to the problem of income because annuities can structure your money into regular payments. While there are many different kinds of annuities, commission-based registered representatives commonly known as brokers may prefer one kind of annuity in particular: a variable annuity.
Unlike other annuities, the variable annuity participates in the stock market. They offer investors the benefits such as market growth, income options, and tax-deferred growth.
WHAT YOU NEED TO KNOW ABOUT TAX-DEFERRAL
An Individual Retirement Account (IRA) and a 401(k) are both types of accounts designed to help today’s workers save for retirement. They also offer tax-deferred growth. This is a benefit that allows you to boost the growth of your investment in three ways:
– One: you earn interest on the principle or base amount of your investment.
– Two: you earn interest on the interest each year as the account grows.
– Three: you earn interest on the money that would normally have to come out to pay for the taxes.
Not all investments offer tax-deferred growth. Bank CDs, for example, require that you pay taxes on any interest earned every year come tax season, and you have to pay the taxes on that interest whether you spent the money or kept it in your account. This is also true for investments such as stocks or mutual funds that earn dividends, but they are taxed at a special capital gains rate that is usually lower than rates for regular income tax.
WHAT YOU NEED TO KNOW ABOUT VARIABLE ANNUITIES
One advantage of the variable annuity is that it allows investors to save for retirement and take advantage of capital gains without having to pay the capital gains tax. This can be an appropriate option for someone who has maxed-out their IRA or 401(k) contribution options and is looking for another place to save money where they can earn those fantastic triple-compounding tax-deferred benefits.
All deferred annuities grow tax-deferred and can benefit from triple compounding. However, if you are using the money in your IRA or 401(k) to purchase an annuity, then tax-deferred growth is a benefit you already have. Variable annuities in particular are one of the most expensive kinds of annuities you can own, so if you are investing in a variable annuity through a tax-advantaged retirement plan, then you will get no additional tax advantage from a variable annuity.
Both the SEC and FINRA have issued warnings about variable annuities that caution consumers to look closely at the benefits and penalties of variable annuities being pushed by brokers who promise bonus credits. These bonus credits typically give investors a percentage bump when they buy into the annuity, but this bump doesn’t necessarily translate into more income later on. Rather, it seems these bonus credits are designed to help brokers sell variable annuities that pay out high commission fees to them, because bonus credits do not benefit all investors.
The tax rules that apply to retirement investments can get pretty complicated and deciding what to do with your retirement savings is perhaps one of the most important decisions of your life. Before you make what could be an irreversible mistake, speak to a qualified financial expert to get a second opinion.