Investor Forum

Try Jim Cramer's Action Alerts PLUS
CLICK HERE NOW

Annuity Pros and Cons

07/29/05 - 10:18 AM EDT

Tracy Byrnes

The upside to an annuity, though, is that there aren't any contribution limits. With a nondeductible IRA, your 2005 contributions are limited to $4,000 a year, with an additional $500 allowed for folks age 50 and above. With an annuity, there are no limits. You can put in as much as you want each year. And you are not forced to start withdrawing from your annuity at age 70-and-a-half, as with an IRA. You can leave the money in your annuity as long as you like.

Sounds good so far, right? Don't get too excited, the catch is coming.

The High Cost of Living

OK, here's the catch.

Annuities are expensive, laden with a ton of fees. There are big upfront sales charges and back-end surrender charges, which linger around 7% if you withdraw the money too soon. In addition, there's mortality and expense charges to cover the risk the insurance company takes on to pay you lifetime income. And don't forget the administrative and annual records maintenance fees.

So all those fees could defeat the whole point of the tax deferral on your earnings. That's because the industry's average expense ratio hovers around 2.35%, according to Morningstar. Some plans could hit 3.5%. The average mutual fund, on the other hand, charges just 1.44%.

And remember, you owe ordinary income tax on your annuity withdrawals, which could be as high as 35%. If, instead, you had your money in mutual funds, you'd only owe the 15% capital gains tax on the earnings.

"People get overly focused on paying taxes vs. generating the highest after-tax return," says Robert Nestor, Principal in Vanguard's Retirement Resource Center, who says they talk people out of using annuities every day for just that reason.

But if you are still convinced that an annuity is right for you, check out products from low-fee investment houses such as Vanguard, Schwab and T. Rowe Price , which offer no-load, low-cost products.


Investor Forum


07/14/05
Second-Half Checkup: A Five-Step Program

Here are some basic moves every investor should take at the six-month mark.


07/11/05
Rethinking Reverse Mortgages

Unless you're the person these products were designed for, it's better to stay away.


07/01/05
Boomer Benchmark Presents IRA Puzzler

At age 59-and-a-half, you can withdraw money from IRAs without penalty. In some cases, it actually makes sense.



05/19/08
Cramer on Top Searched Stocks: Yahoo!

Yahoo! is among the most searched stocks on TheStreet.com. Here's what Cramer had to say about the stock recently.


05/17/08
Jim Cramer's Best Blogs

Catch up on his thinking on the hottest topics of the past week.


04/26/08
Coming Week: Make or Break

Investors will have to deal with a Fed meeting and another flood of earnings and economic data.


05/19/08
Top Rocket Stocks: Ensco

Ensco International and Echelon have the potential to move higher in coming days.


04/28/08
Monday's Analysts' Upgrades, Downgrades

See who made what calls.


05/19/08
Telecom Giants See a Savior in Video

The addition of video is helping telecom companies compete against cable and satellite companies.


05/19/08
Contract Expiration Tempers Oil's Rise

The June West Texas Intermediate contract reflects selling pressure ahead of Tuesday's expiration. But stocks in the sector are generally trading higher.


05/19/08
Analysts' Upgrades, Downgrades: Amazon

See who made what calls.


Your Recent Quotes: Quote Up0 | Quote Down0
Dow S&P 500 NASDAQ
Oil*
Gold
10 Yr
0.00%
%
%
%
Data delayed 20 min
Sign up for our FREE newsletters now.

Keep on top of the market and the critical information you need to make more profitable investing decisions.

  • Cramer's Daily Booyah!
  • Before the Bell

Privacy Policy

See All Free Newsletters

Premium Stock Ideas
Access Action Alerts Plus to find out Cramer’s latest picks now!