professional
portfolios
 Finance:
Bob Smith. CFP
Bob Smith is a
Certified Financial Planner with 34 years of experience and
owner of Southpointe Financial Services. For more information,
call Southpointe Financial Services at 724-746-4100, e-mail at
rms@southpointefin.com, or visit the website at
www.southpointefin.com.
Investment
Tools - Annuities
Annuities have long
been a sound financial tool, but they come in so many different
shapes and sizes it’s hard for the average person to fully
comprehend them all. It is important to have the right tools for
the job you are doing; you wouldn’t use a spoon to dig a
ditch, right? Well, some investment tools can work in the same
manner if not chosen wisely.
Let’s start with
the basics. Annuities are products manufactured by life
insurance companies. They come in two basic forms: Immediate and
Deferred. The names pretty much tell the story-immediate
annuities begin right now, and will pay you a lifetime income
based on the premium paid to the insurance company. A deferred
annuity is just the opposite - an investment that grows tax
deferred, to be paid at some future date.
All of the above
come in two general categories: non-qualified and qualified
annuities. The difference is one of taxation. The term “qualified”
refers to a formal retirement plan such as an IRA or IRA
Rollover. The “non-qualified” simply means after-tax dollars
were used to purchase the annuity. So, non-qualified annuities
can be a valuable tool for deferring current income tax on
current savings and investments. The disadvantage is that there’s
no capital gains benefit and a potential withdrawal penalty.
Like any other
investment or financial product, there are costs to investing in
annuities. We started this discussion talking about annuities
being a life insurance company product, and of course that
brings one layer of expense. Most annuities today are also
purchased as long-term investments – another layer of expense.
Remember, the alternative could be CDs, money markets, stocks,
bonds and mutual funds. When you add it all up, and include the
guaranteed income rider, you are looking at something north of 3
percent per year as the true cost of owning the annuity.
Is the annual
expense worth the tax deferral in the case of earnings on
after-tax money? Are the new guaranteed income riders worth the
peace of mind they may offer? These are questions to be weighed
or answered with the help of a professional advisor. Depending
on your current tax bracket, deferral of income tax on the
earnings may justify the additional expense. A floor guarantee
of income for life may justify the additional expense. Each
individual investor must answer these questions as it pertains
to their situation.
I think you will
agree this can be a very difficult subject to fully comprehend
and understand. I always suggest you consult an advisor
(certified with a degree is preferable) to help you understand
the advantages and disadvantages of all financial tools and
investments. These decisions will affect your own financial life
and maybe those of your children and grandchildren as well.
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