what's is the difference between an annuity and 401k as a retirement vehicle.?

Answer 1

When you invest money in an annuity with a life insurance company, your investment grows tax deferred. Tax deferral means that each year that your investment grows, you do not have to pay taxes on the growth. Instead, you defer paying taxes until you take the money out. (If you invested the money into mutual funds outside a tax deferred account, you would pay taxes on the growth each year.)

Fixed annuities carry a fixed rate of savings with the insurance company. The rate is usually very low and the expenses are usually very high. Fixed annuities require you to leave the money alone for usually 5 to 10 years, with a declining penalty for taking the money out early. If the money is taken out prior to age 59 and a half, you will also be hit with a 10 percent penalty from the IRS for early withdrawal. Dave Ramsey doesn’t recommend these.

Variable annuities invest your money into various types of securities, usually mutual funds. Benefits include the tax deferral of the growth mentioned above and usually allow you to invest in different fund families within the variable annuity. The key to successfully investing in variable annuities is priority and understanding what you are agreeing to and paying for.
Variable annuities are often utilized too early or unnecessarily. Remember, the primary benefit of variable annuities is the tax deferred growth. But if you have available a 401K, 403b, or other retirement plan at work, you already have access to a low-cost tax deferred account. Take advantage of these first. Also, utilize ROTH IRAs that provide tax free growth or TRADITIONAL IRAs that provide tax deferred growth. These plans give you the benefit of tax deferred growth without the additional costs that the annuity will charge you. Use the variable annuity after you have taken advantage of these other options.
Understanding what you are agreeing to and paying for: The benefit of tax deferred growth is significant, but it does not come without costs. First, you will pay a fee to the annuity. Second, you will pay fees to the mutual fund companies inside the annuity. Third, you pay with a commitment to leave the money alone. This means: a) you are agreeing to leave the money alone until age 59 and a half. If you take the money out early, the IRS will hit you with a 10 percent penalty plus the taxes on the growth taken out of the annuity, and b) you are committing to the insurance company that you will leave the money alone according to the schedule outlined in the annuity contract. The penalty for taking it out early is typically a declining penalty. It may be on a 7-year schedule, charging you a 7 percent penalty if you withdraw money in year one, 6 percent in year two, etc.

Annuities do require a little more education than some other investments, and done without understanding the rules or at the wrong time, annuities can be a train wreck. But if done after other pre-tax investments and with money that is going to be left alone for plenty of time, they can be a great tool for getting tax deferred growth. Tax deferred growth is a big deal over time and worth learning about annuities to attain. Flags to watch for when dealing with an advisor concerning annuities are: a) an advisor that won't discuss other options besides an annuity or won't discuss more than one specific annuity, and b) an advisor recommending you move money that already has tax deferred status, such as a 401K rollover, into a variable annuity. 401K dollars already have the benefit of tax deferral and should be moved into an IRA, not an annuity. (Paying annuity fees to move tax deferred money into an annuity for tax deferral is redundant.) One last thing to pay attention to are the bells and whistles that are often sold inside variable annuities. Life insurance, guaranteed returns, long term care benefits, etc. may be appealing to you and even attract you to the variable annuity, but know that they are not free. Understand them and their costs.

Answer 2

Annuity Vs 401k

Answer 3

Difference Between Annuity And Ira

Answer 4

This Site Might Help You.

RE:
what's is the difference between an annuity and 401k as a retirement vehicle.?

Answer 5

My question is I am getting an annuity from civil service and I also was paying social security from my business. When I got my social security I was penalize 75% for getting another source of income. can they do that? If any one knows please explain that to me.

Answer 6

good day, both are proven plans to put your money beside the back yard. To get a solid understanding of the pros/cons may i suggest DaveRamsey.com. I been able to correct some income errors through the site.

Answer 7

go to: money.com

explains and shows the diff between all the different retirement options.

Answer 8

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