Is there any way for me to get rid of the annuity I purchased?
You are allowed to cancel an annuity any time you want to do so, though an early cancellation fee may be charged in the process. Also, if you cancel it before you’re halfway through age 59, the government will penalize you by charging you 10% of the withdrawn amount.
Check your annuity’s contract for surrender charge information – it may even specify a date before which you’ll be penalized for cancellation. As time passes, the surrender charge decreases, usually disappearing entirely after ten years. And most life insurance companies will allow you to take out a percentage – usually around 10% – of your annuity without being charged a fee.
Before you take this step, talk with a financial advisor about penalties and fees that would apply to your specific annuity.
Will I be able to change the annuity I have for one with a preferable rate of interest?
You can, but to receive the best tax treatment, you have to make sure the exchange complies with the requirements outlined in a Section 1035 exchange. According to this mandate of the Internal Revenue Code, you can do so as long as the annuity isn’t…
- cashed in and the proceeds aren’t used to purchase a new annuity. The value of the old annuity must be transferred directly to the new annuity.
- devoid of like-kind property, or property similar in nature and equal in value to the old annuity.
Also, the owner, the annuitant and the beneficiary must all be the same.
Can you explain what an annuity is?
An annuity is a contract agreement made between you and your insurance company, where money is paid to the latter, then paid back to the former (or a beneficiary), in a manner determined by the sort of annuity purchased. They general serve as part of a retirement savings plan.
The funds put into an annuity are safe from taxes until they’re withdrawn. To compensate, if you take your money out before you’re halfway through age 59, you will probably have to pay an early withdrawal fee to the IRS, generally amounting to 10% of the annuity.
Many life insurance companies offer annuities in their line of financial products, and there is a variety of annuities to choose from – though, four types in particular are the most prevalent.
The first is a single premium immediate annuity, in which you would pay the company a lump sum, and then receive withdrawal distributions for a period of time specified by you. The amount would vary according the length of time, as well as whether or not anyone is to receive the remaining balance after you pass away.
A single premium deferred annuity also involves a lump sum payment now, but with withdrawals payed at a later time. The same stipulations apply to this sort of annuity.
An additional premium deferred annuity involves you sending money to your insurance company on a monthly, quarterly, or annual basis, with withdrawals received at a later time.
Lastly, there is variable annuity, which serves as a vehicle for equity investments. A onetime deposit, or spaced-out contributions through the life of the contract, can be used to fund it. You are also afforded options for how to invest it depending on your objectives and investment style. The growth of your annuity in this case is contingent upon the success of your investment decisions.
Are You Taking Your Retirement Advice from President Barak Obama?
Last month the White House decided to get into the business of giving financial advice. The White House’s “Middle Class Task Force” recommended that Americans, many of whom are in a terrible financial bind, begin investing in immediate annuities.
With the volatility of the stock market, the crash of the real estate market, and the staggering unemployment numbers, Americans are looking for any way to preserve their investments and set themselves up for a livable future. The most conservative investments, like certificates of deposit and money-market accounts, are returning almost nothing these days.
If you’re not familiar with these investment options, let me explain how they work. You buy an immediate annuity by making a large investment with an insurer. Then you begin to receive large payouts which last for the rest of your life. An example in a recent Wall Street Journal article shows how a 65-year old buying a $100,000 immediate annuity would receive roughly $7,500 per year.
Should everyone immediately invest in immediate annuities? I think that makes about as much sense as suggesting that everyone should take an aspirin every day, just because for some people, it’s a good way to fend off a second heart attack. Financial planning is never one size fits all.
Some financial gurus suggest, for example, that the best way to use life insurance as part of your planning is to “buy term and invest the difference.” And while that’s a great strategy for some, it’s a horrible mistake for others. In the same way, buying immediate annuities makes great sense for some investors, but is a sure way to a less happy retirement for others.
Today’s interest rates are super low, and as the Wall Street Journal article pointed out, these pension-like investments require you to make a very educated wager that hinges on something most of us know nothing about: how long we’re going to live. If you live a long time, an immediate annuity can be a great investment. But if you don’t, the one who will benefit the most from your investment is the insurance company.
Don’t get me wrong. As someone whose career has been built around helping people to make the right decisions – about life insurance, disability insurance, college savings plans, and yes, annuities – I’m happy to have the White House advocating that Americans take a look at a variety of financial options they might not have considered in the past. But rushing into something is almost always a mistake, and it pays to take your time and to seek the advice of competent professionals before making any major financial moves – especially when your family’s future is at stake.
New law will allow you to manage Long Term Care expenses.
A new tax law with some very favorable tax treatment for long term care insurance benefits from annuities and life insurance has been passed. As of January 2010, any withdrawals or early distributions from life insurance or annuity products to pay tax-qualified long-term care expenses will be tax free – yes, tax free!
