Annuity Investment Plan

Annuities are wildly popular. Are they a good investment?

According to an article (Parade), there is almost as much money invested in annuities to day as there is in 401(k) plans--a whopping $1.8 trillion. New annuity sales are a brisk $18 billion-plus a month, and they're expected to accelerate dramatically as the first baby boomers get ready to retire. But can this product work for you? Here's what you need to know:

What exactly is an annuity? It's an investment that's wrapped inside an insurance contract. You can buy one from a bank, a stockbroker, an insurance agent or a mutual-fund company. There's no tax on your earnings in the annuity until you withdraw them. "Deferred" annuities, which account for 98% of sales, are intended to accumulate money for at least a decade before you withdraw anything.

The pitch: You'll make a bundle thanks to all those years of untaxed growth--and even if you don't, many annuities guarantee that you'll at least get back what you put into them.

Know the details. Whether they work for a bank, a brokerage, a mutual-fund company or an insurer, annuity salesmen earn very high commissions--sometimes up to 12% of the money invested. Federal and state regulators say the sales pitch doesn't always disclose the size of the commission or the fact that annuities typically carry substantial annual charges and huge early-withdrawal penalties. If you want your money back within seven years (sometimes longer), you can forfeit 5% to 10% or more in surrender charges to the insurer. If you're under age 59-1/2, you also owe the government a 10% early-withdrawal penalty.

Regulators have found that annuities often are sold to inappropriate buyers: elderly people who may not outlive the surrender penalty, for example, or parents who intend to cash out before age 59-1/2 to pay for a child's college education.

When to consider an annuity. Consider an annuity only if you already contribute the maximum to a 401(k), an Individual Retirement Account (IRA) and a Roth IRA; if you can afford to leave the annuity untouched for at least 15years; and if you won't need the money until you're more than 59-1/2.

Even then, annuities compare poorly with IRAs and employer-sponsored retirement plans, such as 401(k)s. Those accounts give you a tax-deferral too, but at much lower cost than you'd pay in an annuity. As a result, you get to keep more of your earnings. Many retirement accounts also give you an extra tax break that you don't get with an annuity: Your contributions cut your current tax bill. In an employer-sponsored account, you also may get a matching contribution from your workplace.

Most annuities even compare poorly with taxable investments. True, your money in the annuity grows untaxed. But you may pay such high annual expenses, it can take 20 years before you earn more in the annuity than you would in an ordinary taxable investment with the same return!

So, what you can buy instead?
The following types of accounts all have lower fees than annuities, so you keep more of your earnings. Also:

A 401(k) or 403(b) plan offers more tax breaks than annuities--and often an employer's matching contributions too.

An IRA also can give you more tax breaks, plus a wider choice of investments.

A Roth IRA provides a better tax break than annuities and also gives you access to your money: You can withdraw Roth contributions anytime without tax or penalty.

Source: Parade
For more information on the three basic kinds of annuities and how they actually work, visit parade.com