Disadvantages of Annuities
While there are many benefits to owning an annuity, depending on the type of annuity you’ve purchased, there are also some distinct disadvantages of annuities as well. The disadvantages of annuities discussed here apply mostly to variable annuities, index annuities and fixed annuities; however, if you purchase a product like a fixed index annuity, many of these disadvantages are not relevant, as this annuity (referred to as the “Hybrid Annuity”) combines many of the best features while eliminating some of the worst.
No Tax Deductions for Contributions
As mentioned in the advantages of annuities article in our learning center, annuities are on of the only products available that allow you to grow your retirement savings completely tax-deferred. However, there are no tax deductions available for any contributions made to an annuity during a calendar year, unless purchased inside an IRA or other qualified plan (when funded with contributions to the account).
Early Withdrawal Penalties
Depending on your contract terms, your annuity could have up to a 10% early withdrawal penalty if you withdraw before the age of 59 1/2. This penalty can be in addition to a penalties charged to you under your contract for withdrawing early. There may additional penalties for not withdrawing by a certain age, but these will be dependent on the contract you’ve purchased.
There are certain circumstances, however, where an annuity owner may make a partial or full withdrawal without penalty under certain circumstances including:
- Hardship or disability
- Free look period
While the benefits of purchasing an annuity are relatively simple, selecting the right annuity for your specific situation may be more difficult than expected. A great deal of education and research is required to understand annuities in depth, and it is recommended that you seek out an insurance professional experienced in working with annuities to assist you in selecting the right product.
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