Want to save on taxes today, while building a nest egg for tomorrow?
That's not a pitch for a get-rich-quick scheme, it's a description of annuities - the retirement savings plan many people consider too dull to deal with."Annuities may sound drab, but it's sure nice to have some of your assets in an investment with good tax-deferred growth potential," said Susan Petro, a certified financial planner for Glass Financial Group in Atlanta.
For taxpayers facing a heavier burden next year, annuities could prove especially rewarding because they can save money: taxes are deferred on the interest earned.
Annuities, sold by insurance companies, offer both fixed and variable rates of return.
Fixed annuities function like certificates of deposit, earning a specified interest rate - about 8.5 percent today - over a given time. But unlike a CD, the interest earned in an annuity is not taxed until the money is withdrawn in a lump sum or in periodic payments.
Variable annuities are similar but offer fluctuating rates of return. The money can be invested in money-market accounts or stock and bond mutual funds. In this case, investors may be able to earn a higher rate of return than with a fixed annuity.
"There's more glitz, but more risk," Petro said.
Like Individual Retirement Accounts, annuities carry penalties for early withdrawal before age 591/2. If money is withdrawn prematurely, the investor will have to pay a 10 percent penalty to the Internal Revenue Service and a possible early withdrawal fee to the insurance company.
That's why annuities - long-term investments - are not for everyone. Before investing, people need to have a sufficient amount of cash set aside to cover living expenses and emergencies, said Tom Massey, a financial planner for Consolidated Planning Corp. in Atlanta.
"Annuities are good things for high-bracket yuppies with liquidity," he said.
Anyone purchasing an annuity should be sure to investigate the financial strength of the insurance company selling it. Annuities are not federally insured. A financial planner or rating services, such as Moody's, can advise on the condition of the company.
Annuities have one major advantage over IRAs. They do not have a $2,000 cap on annual contributions like IRAs do.