EVALUATING FIXED-RATE ANNUITIES TODAY: ARE THERE BETTER ALTERNATIVES?

• Published in: Practical Tax Strategies 2009-11, Vol.83 (5), p.272
• Main Authors: Werner, Edward M, Vandenburgh, William M
• Format: Article
• Language: English
• Subjects: Advisors; Alternative minimum tax; Annuities; Deferred income taxes; Fees & charges; Fixed annuities; Insurance companies; Older people; Sales; Tax planning; Taxation
• ISSN: 1523-6250

Often buyers of fixed- rate annuities are older and seeking a stable stream of assured income, similar to that provided by an employer-sponsored defined benefit retirement plan. Traditional selling points of fixed-rate annuities are higher yields relative to other fixed-income investments and tax deferral on account earnings. However, the potential yield advantage is questionable based on the current array of choices, and even the tax deferral advantage is uncertain, to a degree, as well. In addition, the traditional benefits associated with annuity investments contrast with distinct downsides when compared to other investment offerings. This article examines the attributes, tax implications, and alternative investment options related to fixed-rate annuities within the context of today's financial setting. While a soundly researched and well-selected annuity can be an appropriate tax-advantaged investment choice, other potentially safer and better alternatives need consideration during the purchase process, particularly given the current economic climate. Tax advisors should play a critical role in advising clients regarding the full extent of investment risks and toward making better, more informed investment choices. Tax advisors with older clients should proactively protect their clients from any misrepresentations that can occur during highpressure annuity sales pitches.