Immediate annuities are one of the most oldest form of annuity in the US. Like any other form of saving, features have been added to annuities from time to time, to offer maximum benefits to its members. To explain it in the simplest form, you make a starting deposit in an insurance company and in return of your generous investment the insurance company pays you a guaranteed monthly payment for the rest of your life. The payment that you will receive is determined by the insurance company after estimating your life expectancy according to your age and gender.
Immediate annuities pros and cons are huge in number, but first let's see the types of annuities. Annuities are of two types deferred or intermediate. Deferred annuities are invested for a minimum period for 10 years. Intermediate annuities have no collection period. The investor for an intermediate annuity opts for the annuity in whole and starts to receive payments within a year.
Immediate Annuities Advantages and Disadvantages
Immediate annuities can be very tough to understand, most people don't even know they exist; if you are an informed investor, annuities can play a very important part in your retirement plan. There is not much information available on immediate annuities. So let's have a look at some pros and cons of immediate annuities and should you opt for it?
Annuities have many Tax Advantages: Immediate annuities have a good tax benefit for most investors. When you purchase an immediate annuity, the money you invested is considered as tax postponement until you start withdrawing your funds. Once you start receiving your annual payments, the only portion taxable was the portion that you invested. When you retire from your job you are actually at a lower tax category than you were while you were working.
Guaranteed Rate of Money back: Fixed annuities offer guaranteed returns. The amount of the return, depends on the agreement made with the investor. Since the money is guaranteed, the return are usually lower than mutual funds and stock market investments, but people still opt for it with the tempt of guaranteed investment return. Variable annuities also offer a guaranteed investment, but it also mixes this money with investments coming from stocks, index funds or mutual funds and it gives you a chance of a guaranteed rate of return even when the investment portion of your annuities do not perform well.
No Maximum Investment Required: Immediate annuities are not like 401K and IRA accounts, there is no maximum amount invested. So if you are looking to invest as much money as you want, then annuity is the right option for you.
Annuities are not easy to Withdraw: If you are saving money for a long term purpose and you know that you are not going to need it, annuities will make sense to you. If you have the slightest doubt that you may need your invested money for some other purpose then stay away from annuities. Most annuities have a penalty percentage fixed, which is charged if you withdraw your invested money before time. The penalty could be as high as 10% in the starting year. The good thing is you can sell your annuities in the market, but there are transfer fees involved. So read the appropriate rules and regulations before doing so.
Annuity Fees can be High: If you withdraw your money at an early stage, the penalty fees tied to the annuity fees will be higher than normal investments. Immediate annuities are offered by insurance companies, so they don't offer the flexibility that investment companies offer. The fees that they charge can really empty your annuity yield adding the fees 2% to 3% more with some annuities.
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