Pros and Cons of Annuities
Pros and Cons of Annuities. What are the advantages of annuities, disadvantages of annuities, and should you get them?
Disadvantages of Annuities
Money will be locked
The main problem with annuities is that once you purchase an annuity contract, your money will be more or less locked. If you withdraw any money out of the annuity before you reach 59.5 years old, there will be a 10 percent early withdrawal penalty tax levied by the IRS. Thus, your access to your money is limited in exchange for tax deferral benefits from the IRS.
Furthermore, there is a surrender period you have to adhere to. If you withdraw your money before the surrender period expires, surrender charges between 5 to 7 percent will be levied by the insurance company. Nonetheless, most contracts will allow withdrawals up to 10 percent without surrender charges.
Not Federally Insured
The other disadvantage of annuities is that annuities are not federally insured. Thus, you need to be careful to make sure that the insurance company you purchase from is well-established. Otherwise, you could lose your entire account should the company fold over.
Mutual Funds are probably a better alternative
In evaluating the pros and cons of annuities, mutual funds are probably a better alternative.
Mutual funds do not actually cost you much more in terms of taxes, since you would only have to pay the capital-gains tax rate. You also have the added advantage of having access to your money at any point in time without having to pay costly penalties. Thus, annuities are often far too inflexible for most people.
Advantages of Annuities
Exceptions? Here are a few top annuities that may be worthwhile.