Q&A: Annuities and Tax Returns

Question: Could I please get your advice on a fixed annuity that I currently own. It is out of the penalty period and earning 1.7% but could go down to a minimum of 1.5%. The advisor who sold it to me now wants me to roll it over to a new annuity with a different insurance company. I suspect he just wants a commission. Is there something other than an annuity I could roll it over to that would continue its tax deferred status?

Answer: I have never been a big fan of annuities. Aside from the fees and the marginally acceptable investment options that most offer, you have the lack of inflation protection. Your annuity payment is likely fixed. As time goes by, that money will be worth less…. Even TIAA-CREF, the third-largest provider of annuities in the U.S., advises using the products as just one part of a retirement portfolio. A fixed annuity “adds stability to your portfolio because it doesn’t move with the stock or bond market,” says Dan Keady, director of financial planning at TIAA-CREF. Retirees should annuitize enough so that guaranteed income covers basic expenses, he says, while having “a more flexible investment strategy for the remainder of your funds.”

Question:  I am 20. I just received $2300 in tax return. What can be the best way to invest and grow this money?

Answer:  Congratulations on amassing that much money from your tax return. My suggestions would be to either put the money in an S&P 500 index fund or in a Target Date fund. Given your age, your target date would be something like 2060 or 2065.

Add to that money periodically; whenever you can. Years later, you will be happy you did. If you earn 7% a year and add $2300 every year, when you turn 65, you will likely have well over $700K

Most people like to receive a great big tax return at the end of the year. But they don’t often think of that as an opportunity ti invest for their future or put the money towards paying down their mortgage. Instead, they think of it as free money and blow it on a big vacation, a new TV, etc. Alternatively, if you’re expecting no significant change to your finances for this year, contact the HR for your employer and have them withhold $200 less per month in taxes and direct that money to a retirement fund like a 401(k), 403(b), or traditional IRA (or a Roth IRA, if you’ve filled up these ones). This is a perfect opportunity to take advantage of the fact that you were living beneath your means without realizing it.


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