When it comes to retirement savings plans, even annual maximum contributions may not be enough to allow you to retire comfortably. Ken Nuss, CEO of AnnuityAdvantage, recommends annuities for the tools they come with. Continue below to learn how annuities can benefit you.
Tax deferrals allow you to pay applicable investment taxes at a later date.
If you’re contributing the annual maximum to your IRA or 401(k) plan, you’re ahead of most people. But tax-qualified contributions alone will probably not give you what you’ll need for retirement, according to Ken Nuss, CEO of AnnuityAdvantage.
Tax deferral is a powerful tool in saving enough to meet your retirement goals. And that’s why tax laws encourage people to use both retirement accounts and annuities.
“Retirement accounts are great, but they have strict annual contribution limits. Because nonqualified annuities don’t, they can play a key role in achieving your retirement goals,” he points out.
Consider a fixed annuity paying 3 percent — a rate that’s readily available today — versus a certificate of deposit paying the same rate. Assume the buyer’s combined federal-state income tax rate is 25 percent, a typical figure. After 10 years, a $100,000 premium payment made to a tax-deferred annuity will grow to $134,392. But the CD will only grow to $124,920, assuming income taxes are withdrawn and paid each year.
That is a $9,472 advantage for the annuity owner when compared to the bank CD. After 20 years, the annuity advantage increases to $24,560, Nuss says.
This comparison, however, ignores the fact that annuities today typically pay much more than a CD of the same duration. A recent web search shows that the highest yielding CD on the market was 2.35 percent for a five-year term — that’s 21.7 percent less than 3 percent.
The CD owner pays taxes on the interest annually. The annuity owner will owe tax on accumulated interest when it’s withdrawn. Withdrawals, however, can be put off until the owner needs the money and may be in a lower tax bracket. And there’s also the option of eventually annuitizing the money, which spreads out the tax burden over one’s lifetime, he says.
Besides tax deferral, a fixed annuity offers a guaranteed rate and guaranteed return of principal. All authorities on investing recommend diversifying one’s investments among stocks and fixed-income products, which include savings and money market accounts, bonds, CDs and fixed annuities. As you get closer to retirement, you should shift a larger percentage of your money from equities to fixed-income.
“Since you’re going to need balance in your portfolio to counteract the volatility and risk of stocks, you might as well get the best long-term return from your fixed-income allocation. An annuity can give you both an attractive rate and tax deferral,” Nuss says.
Annuities do have one marked disadvantage: When you make a partial withdrawal, interest earnings are considered withdrawn and taxed before principal. But even that disadvantage has a positive aspect.
“Since you know you’re going to pay a tax on withdrawals, you have a strong incentive for leaving your money in the annuity until you need it during retirement instead of spending it on something frivolous,” he says.
And while most people think of using fixed annuities only for taxable (nonqualified) money, they’re also a compelling choice for a portion of your IRA money, Nuss says. While the tax- deferral feature doesn’t apply to an IRA, which is already tax-deferred, or to a tax-free Roth IRA, an annuity still has the benefits of guarantees and a higher rate than a CD or other fixed-income options.
Rates on fixed annuities have risen a little this year. They now pay up to 3.30 percent for a seven-year annuity, up to 3.15 percent for a five-year contract, and up to 2.10 percent for a three-year annuity, according to AnnuityAdvantage’s database of 290 fixed-rate annuities from 35 insurers.
Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information is available from the Medford, Oregon, based company at https://www.annuityadvantage.com.
Contact: Henry Stimpson, Stimpson Communications, 508-647-0705, Henry@StimpsonCommunications.com