Cents and Sensibility


Fixed annuity might help
fill retirement planning gaps

Can you ever save too much for retirement? Probably not. You should plan on spending two to three decades as a retiree, so you'll obviously need a large and accessible supply of retirement income. And you'll need this money to come from many sources -- one of which could be a fixed annuity.

A fixed annuity is a contract with an insurance company. The insurer guarantees that it will pay you a minimum rate on your annuity for the duration of the contract -- 5, 10, 15 years or however long you choose. (The guarantee is backed by the claims-paying ability of the insurer.) Some companies may offer a "bonus" rate the first year, after which the rate drops off. But here's the key benefit: You pay no taxes on your earnings until you withdraw the money. Thus, a fixed annuity offers the same type of tax deferral as a 401(k) or a "traditional" IRA.

When it's time to take money out of your annuity, you can collect a lump sum or accept a series of payments, either for a fixed number of years or for life. Keep in mind, however that a fixed annuity is designed for retirement. Consequently, most annuities have surrender charges, which means you will be penalized if you withdraw all or part of your money before the surrender period ends. Some fixed annuities let you withdraw a certain amount -- such as 10 percent each year -- without penalty. Whenever you withdraw money, you'll pay taxes on the accumulated earnings; if you're younger than 59 1/2, you may also have to pay a 10 percent IRS penalty on the earnings.

Is a fixed annuity right for you? It depends on your situation. In general, you may want to "max out" on your traditional or Roth IRA and your 401(k) before you invest in a fixed annuity. Why? For one thing, your IRA and 401(k) provide you with a wide range of investment options; you can choose the ones that best suit your risk tolerance and need for growth. Furthermore, IRAs and 401(k)s offer some features that you can't get in an annuity. For example, you can take out a loan from your 401(k) and pay yourself back on a repayment schedule that's convenient for you.

Once you have put all you can into your IRA and 401(k), and you still want to put more tax-deferred money away for retirement, then you might want to look more closely at a fixed annuity. Besides tax deferral, you'll get a couple of key advantages. First, you can put a lot of money into a fixed annuity; there are no contribution limits, unless the annuity is held within a qualified retirement plan, such as a 401(k) or an IRA. And second, you'll know how much you're going to earn over the course of your contract. Finally, if you think your tax bracket will drop during your retirement years, you'll reap the full benefits of the annuity's tax deferral.

Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at:

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