The drawbacks of fixed annuities

drawbacks of fixed annuities

Are fixed annuities flawless? Of course not! In fact, there are several disadvantages that you must be aware of before purchasing.

No frills

The main disadvantage with fixed annuities? They don’t have the earning potential power that riskier annuities have. Remember, you’re able to yield greater interest rates when an investment portfolio or stock index thrives. At the same time, you’re also taking a financial risk if the market plummets.

No inflation protection

Because we’re talking about fixed annuities here, growth is, well, fixed. As such, this may prevent you from keeping up with inflation. In turn, this could decline the actual value over time.

No capital gains tax rates

Yes. Fixed annuities are tax-deferred. But, you still have to pay taxes on them once money is withdrawn from your annuity. That makes this taxed as ordinary income and prevents you from taking advantage of lower capital gains rates.

Penalties for early withdrawals

Let’s be crystal clear here. Annuities are designed specifically to help you save for your retirement. That’s why fixed annuities are considered long-term investments. With that in mind, if you make a withdraw from an annuity prior to the age of 59½, you will be facing a hefty 10% penalty.

Surrender charges

What if you aren’t thrilled with your interest rates after they reset? Too bad. You’re stuck with it. The exception is if you make an early withdrawal, which will result in penalties.

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