Risks and Annuities
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Important information consumers should keep in mind:
Tax risk: When you retire and start to get income from your annuity, you will more than likely be in a different tax bracket. This different tax bracket may or may not counter act the rising tax rates. This could mean that you’ll have a higher tax bill. Consult a financial professional to make sure when you should start receiving funds from your annuity.
Inflation risk: You’re guaranteed a fixed return from a fixed annuity. However, if your annuity return doesn’t keep up with the current inflation rate, you could loose buying power.
Market risk: With a variable annuity you have a greater chance of high returns, as well as greater risk factors. They may also guarantee a minimum return.
Company risk: The strength of the insurance company will affect the strength of your investment. Even though some states offer a reimbursement of funds of debunked insurance companies, it makes sense to purchase from a strong and high rated company.
Liquidity risk: Funds you invest into a deferred annuity should not be considered liquid. In other words, Once funds are invested, don’t count on being able to use the funds until you’re 591/2. If the funds are pulled out of the annuity before age 591/2, you will receive a surrender fee as well as a 10% tax penalty from the IRS. With early withdrawal of funds, you will also have to pay taxes on any funds earned (profit).
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