Tax–deferred annuities come in two main flavors. Fixed annuities pay a rate of interest for a specified period of time. Variable annuities, meanwhile, allow you to select from a collection of professionally managed investment choices, known as subaccounts, which can fluctuate in value along with the stock and bond markets. For instance, you might opt to invest your variable annuity in a mix of stock–market subaccounts in the hope of earning long–term growth.
No investment product is right for everyone-and that includes tax-deferred annuities. As with other retirement accounts, you may face taxes and penalties if you make a withdrawal before age 59½. Also, overall annuity costs are often higher than for other investments and many annuities impose a fee if you withdraw before the end of the surrender–charge period. Indeed, before investing in an annuity, you should consider contributing the maximum allowable to your employer’s 401(k) or similar plan and to your Individual Retirement Account (IRA). But if you have maxed out on those opportunities and you are looking for additional tax–deferral, an annuity may make sense.
Intrigued? After discussing the pros and cons with your Financial Advisor, if you decide to add a tax–deferred annuity to your portfolio, you could potentially get these benefits:
1. No contribution limits. In 2011, if you’re under age 50, your 401(k) contributions are capped at $16,500 and your IRA investments are limited to $5,000. If you are age 50 or older, your 401(k) and IRA contributions are limited to $22,000 and $6,000, respectively. By contrast, there are no IRS-imposed limits on how much you can contribute to an annuity each year.
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