As an architect saving towards retirement, you know that employer-sponsored plans, such as 401(k)s and IRAs, are the best ways to invest for retirement. While both are good options, if you’ve already maxed out your contributions to those accounts and want to save more, an annuity may be a good investment to investigate.
What’s an Annuity?
An annuity is a tax-deferred insurance contract. While details may vary, it generally works that you invest your money (either a lump sum or a series of contributions) with a life insurance company that sells annuities (the annuity issuer). The period when you are funding the annuity is known as the accumulation phase. In exchange for your investment, the annuity issuer promises to make payments to you (or a named beneficiary) at some point in the future. The period when you are receiving payments from the annuity is known as the distribution phase. You’ll decide when to start receiving payments after you retire. Annuities may be subject to certain charges and expenses, including mortality charges, surrender charges, administrative fees and other charges.
Consider the Pros and Cons
An annuity can often be a useful addition to your retirement portfolio for reasons that include:
- Your investment earnings are tax-deferred as long as they remain in the annuity. You don’t pay income tax on those earnings until they are paid out to you.
- An annuity may be free from the claims of your creditors in some states.
- If you die with an annuity, the annuity’s death benefit will pass to your beneficiary without having to go through probate.
- Your annuity can be a reliable source of retirement income, and you have some freedom to decide how you’ll receive that income.
- You don’t have to meet income tests or other criteria to invest in an annuity.
- You’re not subject to an annual contribution limit, unlike IRAs and employer-sponsored plans. You can contribute as much or as little as you like in any given year.
- You’re not required to start taking distributions from an annuity at age 70½ (the required minimum distribution age for IRAs and employer-sponsored plans). You can typically postpone payments until you need the income.
But annuities also have some potential drawbacks to consider:
- Contributions to non-qualified annuities are made with after-tax dollars and are not tax deductible.
- Once you’ve elected to annuitize payments, you usually can’t change them; however, there are some exceptions.
- You can take your money from an annuity before you start receiving payments, but your annuity issuer may impose a surrender charge if you withdraw your money within a certain number of years (e.g. if less than seven years) after your original investment.
- You may have to pay other costs when you invest in an annuity (e.g., annual fees, investment management fees, insurance expenses) that are deducted from your principal.
- You may be subject to a 10% federal penalty tax (in addition to any regular income tax) if you withdraw earnings from an annuity before age 59½, unless you meet one of the exceptions to this rule – which is similar to a 401(k).
- Investment gains are taxed at ordinary income tax rates, and not at the lower capital gains rate.
Choose the Right Type
If you think an annuity is right for you, your next step is to decide which type of annuity. If you’re overwhelmed by all of the annuity products on the market today, the reality is that most annuities fit into a small handful of categories. Your choices basically revolve around two key questions.
First, how soon would you like annuity payments to begin? That probably depends on how close you are to retiring. If you’re near retirement or already retired, an immediate annuity may be your best bet. This type of annuity starts making payments to you shortly after you buy the annuity, typically within a year or less. But if you’re younger and retirement is still a long-term goal, then you’re probably better off with a deferred annuity. As the name suggests, this type of annuity lets you postpone payments until a later time, even many years down the road.
Second, how would you like your money invested? With a fixed annuity, the annuity issuer determines an interest rate to credit to your investment account. An immediate fixed annuity guarantees a particular rate and your payment amount never varies. A deferred fixed annuity guarantees your rate for a certain number of years; then, your rate will fluctuate from year to year as market interest rates change. A variable annuity, whether immediate or deferred, gives you more control and the chance to earn a better rate of return – although with a greater potential for gain, comes a greater potential for loss of principal. You select your own investments from the sub-accounts that the annuity issuer offers. Your payment amount will vary based on how your investments perform.
It pays to shop around for the right annuity. In fact, doing a little homework could save you hundreds of dollars or more each year. Why? Rates of return and costs can vary widely between different annuities. It’s important to shop around for a reputable, financially-sound annuity issuer. There are firms that rate insurance companies based on their financial strength, investment performance and other factors. Be sure to check those ratings.
The AIA Trust is here to help.
The AIA Trust offers annuities and retirement savings plans through AXA Equitable to assist you in achieving your retirement goals. Plans can be established for one-person firms (or components)—or for employees—utilizing a variety of retirement savings and distribution vehicles. AXA can assist you toward achieving your goals based on 50 years of experience working with association members and over 25 years working with AIA architects. AXA can help you review your options and offer you choices that can alleviate the burden of establishing and managing a retirement savings plan. It’s one of the ways that the AIA Trust makes it easier for you to focus on doing what you do best: architecture.
Please call 800-523-1125 to speak with a retirement program specialist or visit www.TheAIATrust.com/retirement-plans/ to learn how you can start saving.
Note: Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from the insurance company issuing the variable annuity or from your financial professional. You should read the prospectus carefully before you invest.
This article has been written for general information purposes only. This material does not constitute an offer or solicitation of any kind and is not intended, and should not be relied upon, as investment, tax, legal, or financial advice or services.
The Members Retirement Program is funded by a group variable annuity contract issued and distributed by AXA Equitable Life Insurance Company (AXA Equitable), NY, NY. Annuities have limitations and restrictions. For costs and complete details contact a Retirement Program Specialist. AXA Equitable and its affiliates do not provide tax or legal advice and are not affiliated with the AIA. You should consult with your attorney and/or tax advisor before purchasing a contract.
All rights reserved. This article is prepared and published by Broadridge Investor Communication Solutions, Inc. © 2019.