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2010-12-01, 09:48:10 return
Annuities - Advantages and Disadvantages
In this article we aim to outline the characteristics of a Variable Annuity, and provide an overview of the advantages and disadvantages of this type of investment.Annuities, as we discuss them here, are used as a retirement investment vehicle. They provide the investor with a tax deferred way of generating interest. Annuities differ in the options they provide the investor, their opportunity for a sizable return, and their safety. A Variable Annuity is the riskier type of Annuity. It allows the investor, to invest the Annuity in the stock market, or in mutual funds. The investor (over 60 years old) receives monthly payments, dependent on the results of the investments. If the investor is not yet 60 years old, the investor still receives the tax benefits, but cannot receive payments yet. It can be for a certain number of years, or for life. Most Variable Annuities offer a money market sub account, allowing the investor to switch to a secure fixed rate, at anytime.AdvantagesHistorically, stock exchanges such as the S & P 500 have an annual return averaging over 12%, while historically Fixed Annuities, Treasury Bills, and secure Bonds usually offer single-digit interest rates. A Variable Annuity allows you to potentially receive a higher returnAll Annuities are tax deferred, which can turn out to be a very large benefit over other investment vehicles.
This type of Annuity allows you to provide Inheritance probate-free - allowing your loved ones to avoid estate taxes. It also allows you to provide Tax-Free Gifts of up to $10k per year, per person.Variable Annuities provide higher liquidity than Fixed Annuities. You can withdraw as much as 10% annually in the first year without penalty. If at any time, your confidence about the market changes, you often have the option to switch to a fixed rate of interest - providing a very secure investment vehicle. Change your risk/return based on market conditions.DisadvantagesVariable Annuities are not as secure as Fixed Annuities, or CD's. You are taking a risk putting your money into the market.There are often Management fees, just like a mutual fund. Always watch out for commissions or the fees involved.Although this investment gives you some liquidity, don't invest money you'll need tomorrow. Income withdrawals before the age of 59.5 or by more than the allowable percent per year (differs per contract) can result in a 10% IRS penalty.Like any type of investment, you should know exactly what you're getting into ahead of time. Overall, Variable Annuities can offer a great investment vehicle to grow your nest egg tax deferred, but there are risks. Always consult with someone you trust before making this important decision.
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