Six myths you need to know about annuities

There are a lot of myths about annuities. With so many types to choose from, figuring what is factual and
what isn't about them can be a challenge. To help you understand how annuities work, here are six of the
most common misnomers about them.

1. All annuities are the same

Although annuities share many common attributes, each annuity type has its own set of rules. In general, an
annuity is a contract between you and an insurance company in which you make a lump sum payment or
series of payments and, in return, you receive a regular income stream at some point in the future. There are
a range of options, but typically they fall into two categories – an immediate annuity and a deferred annuity.
An immediate annuity allows you to make a lump-sum deposit and immediately start drawing income. With a

deferred annuity, you give an insurance company premium and the company provides options to allow for an
income stream when elected. Typically, you’d not start getting payments until years down the road.

2. I can’t withdraw funds from my annuity until I’m old

Many annuities give you the option to withdraw a portion of the contract without a penalty. Some annuities
may require a waiting period before you can access the full value. You may be subject to fees and penalties
for an early withdrawal, but many insurance companies allow you to take up to 10% of the accumulation
value per year without paying fees.

3. All annuities have high fees

Most annuity types have no maintenance or annual fees. Those that do will have varying fees depending on
the type of annuity and any additional benefits it may provide. Annuities can offer valuable features that aren’t
typical of other investment options, like tax deferral, income guarantees, guaranteed minimum values or even
a guaranteed minimum death benefit. Your annuity contract should be transparent about costs. Make sure
you understand any fees associated with the annuity and the benefits it can offer, then weigh those against
other products.

4. I will lose all my annuity money when I die

If you don't want the insurance company to keep your contract value when you die, you can choose an
annuity payout option that allows for that. Everything the annuity can and cannot do should be written in your
contact. Many people correctly understand that an insurance company will keep the remaining value if they
have a "life-only" payment option within an annuity contract, but life-only is just one of many payment options
you can choose from for an annuity contract.

5. Annuities are for retirees

Annuities can be excellent tools for accumulation and income, no matter your age. Many young workers are
using annuities as a tax-deferred way to save for their future. Of course, no two situations are the same. It’s
important to seek tax advice from a qualified tax professional when purchasing an annuity to understand any
withdrawal penalties that may apply.

6. Annuities are bad for taxes

Interest credited on any annuity will compound on a tax-deferred basis until you begin taking out funds. Over
time, you may have the potential to build more retirement income than you would have been able to had your
earnings been taxed as income. While IRAs and 401(k)s also offer tax deferral, those contributions typically
have a yearly cap. Fixed annuities commonly have no annual IRS contribution limits. Fixed annuities are
long-term, tax-deferred products and can be a valuable option if you are looking to grow your retirement.