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Annuities, are you losing money?

Annuities have been a popular retirement investment tool for many years. Most brokers sell annuities as a way to invest money in a tax-deferred account that can provide guaranteed income during the retirement years. While annuities may still be an important part of some people’s retirement and investment strategy, more and more people are seeing the downside of these retirement vehicles.

The first problem of the annuity is the tax-deferred mechanics. Most investments in a tax-deferred annuity are not tax deductible, unless purchased through an IRA. When the annuity grows in value no tax payments are incurred, this is what is meant by deferral. However, once the dividends are to be paid out the money may be taxed at ordinary income tax rates, and not lower capitol gains rates. If the annuity is passed on to heirs, the money is taxed at ordinary income tax rates. If the owner of an annuity is at a higher tax bracket upon payout, taxes will claim a bigger chunk of the money than may have been planned for.

The second problem with annuities is the rate of return and cost structure. There are many different types of annuities. However, most of them invest in a collection of stocks, bonds, and other securities, much like a mutual fund. But, with an annuity you may be more limited in your options for directing that investment. The rate of return may be worse than the market generally. The cost structure associated with most annuities is more expensive than most mutual funds or investment accounts.

The third problem with annuities is loss of freedom. The money in an annuity is generally locked up. A prudent investor cannot take advantage of their skill. If the owner of an annuity needs access to a lump sum, they may face steep costs and tax penalties to access their money. The entire annuity industry seems to be centered on the idea that people cannot be trusted to invest their own money wisely. The annuity does not give the owners the freedom to use their money as they see fit.

Low interest rates and a fluctuating market make it more important than ever for anyone planning for retirement, or living off their retirement, to be able to be nimble. Responsible financial planners and investment advisors realize that needs change as investors age and life circumstances change. Having large sums of money locked in at low interest rates, or earning sub par rates of return in annuities prevents investors from maximizing their money and taking advantage of changes in the market.

If you have an annuity that you would like to change into a lump sum contact the professionals at Einstein Structured Settlements today. Representatives can help you regain freedom over your money.