Fixed Index Annuity Pros and Cons List
When it comes to investing, there are never any sure things. No matter how well you research, there are always advantages and disadvantages no matter what decision you make. Planning for retirement is no easy task and with the help of a fixed index annuity, you can make this process much simpler. However, there are disadvantages to go along with the many different advantages.
It is important for investors to consider all of these pros and cons, so that they are able to make the most informed possible decision. What would be considered an advantage by one person would be considered a disadvantage by another. Taking the particulars of your own financial situation under consideration is crucial. The following list of pros and cons will help soon to be retirees make the best decision possible. In order to make an informed choice, a person must be thoughtful, giving themselves the time needed to choose an annuity that works best for their personal financial situation.
List of Pros of Fixed Index Annuity
1. Higher Return Of Investment
A fixed index annuity is not a sure thing, much like any other investment you will make. But did you know that a fixed index annuity comes with a much higher rate of return on investment than a variety of other options you could choose from? Bonds, CDs and money markets are all considered safer by many, but in reality, do not deliver the same return of investment as a fixed index annuity.
When planning for retirement, a person must know that the annuity they choose will have a great yield. Without one, their life savings will not experience the same level of growth and their retirement plans could be put in jeopardy. That’s why it is crucial to select the annuity plan that leads to the highest possible return of investment and plan for the financial future.
2. Life Insurance/Inheritance Assurance
Ensuring that your loved ones remain taken care of, even after you have passed away, is one of the main advantages that comes with opening a fixed index annuity. Thanks to fixed index annuities, life insurance payouts are guaranteed. Rather than forcing your family members and loved ones through a difficult probate process, they are able to collect on the life insurance policy immediately.
In addition, inheritance agreements also become much more ironclad when a person operates through the use of a fixed index annuity. Probate courts have been known to tie up inheritances and a variety of family members could come out of the woodwork to try and block the passage of funds to your rightful heirs. With a fixed index annuity, a person gains the peace of mind that comes with knowing that their assets will be passed on with minimal hassle.
3. Unlimited Ability To Contribute
A 401K or an IRA may work better for some people, those who do not plan on making major contributions to the account. However, a person who wishes to make regular, larger contributions to their annuity will likely benefit from a fixed index annuity. Thanks to the combination of a higher return on investment and the unlimited ability to contribute, an investor is able to maximize their returns and earn additional monies.
An IRA or a 401K could be the safer plan, on paper. This is where considering your own particular financial situation is important. If you need an annuity that you are going to be making minimal contributions to, then it is best to choose one of the aforementioned options. When you need an annuity that provides you with the leeway to make regular, sizable contributions, then a fixed index annuity is your best bet.
4. Desirable To Long Term Investors
Fixed index annuities are designed to appeal to citizens who wish to keep their fixed index annuity for at least ten years. Some financial experts even advise that a person should not open one unless they plan on using the annuity for at least 20 years. Because there are penalties that come with making withdrawals before the person has reached a certain age (59.5), it is best to begin a fixed index annuity with the long term in mind.
A fixed index annuity is a great way for a person to ensure that they will be taken care of throughout the retirement. Someone who is looking for a shorter term of investment and more immediate ability to use their monies may wish to look elsewhere. There are very few guarantees in life, but a fixed index annuity can provide at least one of them.
List of Cons of Fixed Index Annuity
1. IRS Mandated Withdrawal Penalties
Should you decide that you need to withdraw from your fixed index annuity before you reach 59.5 years of age, you will experience a severe penalty. The IRS charges a whopping ten percent penalty on all withdrawals that are made before the person is over the age of 59.5. Even a mere $10,000 withdrawal from the fixed index annuity will cost the person an additional $1,000. If you will be needing to make withdrawals from the annuity, then you may wish to consider a variety of other options.
There are several other annuities that a retiree can sign up for that allow them to make withdrawals without all of the harsh financial penalties. There are also penalties assessed when the owner of the annuity makes withdrawals before the account’s reached a full level of maturity. The fixed index annuity also comes with a 10 percent portion that is able to be withdrawn annually once the person has reached a certain age. Withdrawing any more than that 10 percent causes the person withdrawing to incur penalties.
2. Down Years Affect The Interest Rate
The layperson has very little ability to predict the constantly changing tides of finances. As such, a fixed index annuity can be very risky. During the down years, it is eminently possible for a person to receive zero interest crediting. Since most will prefer to have accounts that actually accrue interest and streamline the process of saving for retirement, this may not be preferable.
While this caveat may not matter to everyone, those who are expecting any account they open to garner interest could decide that they would rather look elsewhere. When saving for retirement, the average citizen does not have years to waste as they watch their fixed index annuity to make sure that the account is accruing interest. Time is typically of the essence.
3. No FDIC Insurance
The safety of fixed index annuities has been called into question, as those who begin using one are not afforded the same level of security as those who are open other annuities and retirement accounts. The FDIC does not provide insurance of any sort to people who open a fixed index annuity, which can give pause to many who were considering starting an FIA of their own.
One of the main reasons people invest in accounts of this nature, instead of stashing the money under a mattress, is because they yearn for the security that comes with FDIC insurance. Without it, any number of things can happen to the annuity. Since no one wishes to end up penniless during their golden years, this reality is often enough to make concerned citizens look elsewhere.
4. Taxing Of Earnings
While a person is making withdrawals or paying out income, they are subject to the same amount of taxes on either of these earnings, unlike some other annuities. In addition, fixed index annuities come with the LIFO requirement. This means that the tax requirement extends to the last monies in and the first monies out.
Thanks to LIFO, your job’s earnings are what is taxed first. There are instances where the fixed index annuity will have annuitization, which allows for certain tax related exclusions, but this is not the norm for all accounts of this nature. Before starting down the path to a fixed index annuity, be sure to ask plenty of questions about the tax implications and how these taxation rules are going to affect your personal earnings.