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Using Annuities to Invest
for Future Retirement

Radio Transcript, 2 minutes 35 seconds, for use during week of Nov. 12.

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection Trust, providing investor education on the web at: investorprotection.org.

Description: Penny, Susan and Ira talk about factors to consider when looking at annuities

Susan: Penny, we’ve talked about fixed, variable and equity-indexed annuities and you said that annuities are most often purchased for future retirement income.

Penny: That’s right.  Typically, annuities offer tax-deferred growth of earnings and make regular payments for a fixed period of time, which can be useful in retirement.

Ira: And annuities are sold by insurance companies, correct?

Penny: Yes, but there are some differences among the three types.  While all three--fixed, equity-indexed, and variable-- are regulated by state insurance commissions, in addition, variable annuities, which are deemed securities due to the risk being borne by the purchaser, are also regulated by the Securities and Exchange Commission and the National Association of Security Dealers. 

Susan: What are some of the factors to consider when looking at annuities?

Penny: Earnings on annuities grow tax-deferred.  Withdrawals can be made after age 59 and a half but the withdrawals are taxed as ordinary income at your regular tax rate, as opposed to long-term capital gains like mutual funds.  Withdrawals prior to 59 and a half are subject to income tax and a 10% penalty.

Ira: Are there other fees or charges to be concerned about?

Penny: There can be a lot of expenses.  With variable annuities, you may pay an annual fee, sales charges on the subaccounts and an annual contract charge.  There may also be surrender fees if you withdraw funds early from any annuity.

Susan: What happens if I die and there’s still money in my annuity?  Does it simply go to my beneficiary?

Penny: Your beneficiary will have to pay the taxes on the earnings you deferred. 

Ira: Sounds like I should review the options carefully before deciding whether annuities are the right choice for me.

Penny: That’s exactly right.  If you consider an annuity purchase, you’ll want to understand what you’re purchasing, the long term nature of that purchase and the fees.  Always ask your agent for an explanation of anything you don’t understand. And – this is important – comparison shop before buying from a company.

Susan: Thank you, Penny.  This is very helpful information.

Penny: You’re welcome and remember for more information visit the ISU Extension website at extension.iastate.edu and look for ‘invest wisely.’

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Updated November 12, 2007