Frequently Asked Questions
1. Can I lose money in an annuity?
It depends entirely on the type. With a fixed annuity from a financially strong insurance company, your principal is considered very safe. The risk of loss is extremely low. However, with a variable annuity, your principal is invested in the market and is not protected from loss. You can absolutely lose money if your underlying investments perform poorly. Fixed-indexed annuities protect your principal, but your gains are not guaranteed.
2. How are annuities and investments taxed differently?
This is a critical difference. Money inside a deferred annuity grows tax-deferred. However, when you withdraw the earnings, they are taxed as ordinary income, at your regular income tax rate. For investments held in a taxable brokerage account, you pay capital gains tax on your profits when you sell. For assets held over a year, this long-term capital gains rate is often lower than the ordinary income tax rate, which can be a significant advantage for investments. For official information on federal taxes, you can always visit the IRS website.
3. What happens to my annuity if the insurance company goes bankrupt?
Unlike bank deposits, annuities are not insured by the FDIC. However, they are protected by state-level “guaranty associations.” These associations provide a layer of protection up to a certain limit per policyholder if an insurer fails. These limits vary by state. This is why it is absolutely essential to choose an insurance company with a top-tier financial strength rating from independent agencies like A.M. Best, Moody’s, or Standard & Poor’s.
4. I’m already 70. Is it too late for me to invest in the stock market?
No, it is not too late, but your strategy should be different from a younger person’s. With a longer life expectancy today, your retirement could last 20 years or more. You still need your money to grow to combat inflation. However, a senior’s portfolio should be more conservative. You would likely have a higher allocation to less volatile assets like bonds and dividend-paying stocks and a smaller allocation to aggressive growth stocks. The goal shifts from maximum growth to a balance of capital preservation and moderate growth.
5. Can I use my 401(k) or IRA to buy an annuity?
Yes, you can. You can roll over funds from a 401(k) or a traditional IRA into an annuity without triggering an immediate tax event. This is a common way people fund an annuity purchase for retirement. However, it’s important to consider that your IRA already provides tax-deferred growth. Placing it in an annuity means you are putting a tax-deferred product inside another tax-deferred product, which some experts argue is redundant unless the primary reason is to secure the annuity’s guaranteed income feature.
For official information on Social Security and Medicare, visit SSA.gov and Medicare.gov. Federal tax information is at the IRS.
