An annuity is a contract made between you and an insurance company where, in exchange for a lump sum payment, the insurance company will provide you and your family with long-term care benefits, a source of income, asset growth, and a death benefit. Types of annuities include: joint, individual, impaired life, guaranteed, fixed, variable, immediate, and deferred; the most common being a Fixed Annuity.
However, as enticing as annuities may seem to those who are nearing retirement, annuity payments can be tricky, inflexible, and binding. Nevertheless, for those who have run out of options for IRA and 401(k) funding, annuities begin to look like an appealing option. If you are unfamiliar with annuities and what they offer, then you’ve come to the right place. Here are 4 things you should probably know about annuities before investing in one:
1. Annuities don’t offer tax deductions immediately.
Any annuities that are purchased externally from an IRA are funded through the means of after-tax dollars. In simpler terms, you won’t be getting a tax break right off the bat by investing in an annuity.
2. Most annuities have early withdrawal penalties
Unless you are faced with a debilitating ailment or pass way, you and your family are not allowed to make early withdrawals from your annuity. If you do, you will be faced with a hefty penalty. Normally, you will be charged with a fine of 10% of your withdrawal amount in the event you take money out of your annuity before your allotted time. The same rule applies to IRA’s and 401(k)’s: if you decided to withdraw money before the age of 59 ½, you will be penalized with a 10% fine of your withdrawal amount.
3. Things get expensive if you cancel
If you break the signed contract made with an investor and decided to cancel your annuity plan, you will be held accountable for a significant amount of money. This is typically known as a surrender charge and based on the investor you purchased your annuity from, you will be required to pay approximately 7% of your total funds during the first year. The only sure way you can avoid paying a surrender charge is if you decided to cancel your plan during the first 30 days.
Of course, similar to the penalties for withdrawing funds early, there are a few exceptions in which you won’t be required to pay a sum of your money if you cancel your plan early. If you become disabled, terminally ill, or pass away, you or your family will not be faced with fines upon canceling your annuity plan.
4. Annuity withdrawals are partially taxable
Any withdrawals that are made from your annuity will be subject to taxes. However, the taxation rules and process differ from your standard IRA or 401 (k).
In the case of an annuity, you will be taxed in what they call a ‘last-in, first-out’ basis. This means that when you make your withdrawals, your money will be classified as ‘earnings’ and therefore, will be taxed. However, this will no longer be the case when the overall value of your annuity becomes lower than the sum you paid in premiums.
Sell Your Annuity or Structured Settlement with Rising Capital Associates
Annuities can be a very difficult investment to take part in and requires many rules, terms, and guidelines to be followed accordingly. However, there are many people who decide to invest in an annuity and later find that it does not meet their expectations or simply can no longer afford the premiums that are required of them to pay.
If you find that your annuity no longer fits your current needs, sell your annuity payments for cash. We will purchase your unwanted annuity and in exchange, will provide you with a lump sum paid in full! With our services, you won’t ever have to worry about losing your annuity money through the penalties of canceling your plan early. Why wait when you can have your money now?