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Are Annuities a Good Investment Choice?

When returns from traditional investments are poor or an investment advisor doesn’t hold a license to sell securities, annuities generally become a part of the conversation.

So how do you know if an annuity is a good choice for your situation? Consider the following:

Annuities offer several advantages:

  1. As an insurance product, it provides bankruptcy protection;
  2. It provides tax-deferred income growth;
  3. It contains a guaranteed death benefit;
  4. It qualifies for Sec. 1035 tax-free balance rollover;
  5. Fixed-income options are generally guaranteed higher than bank or bond returns;
  6. Variable-income options generally provide market rate security options; and it’s a
  7. Great investment vehicle for a minor trust (provides grantor control of minor’s investments until a targeted time).

But annuities also include several disadvantages:

  1. Annuities contain a high expense ratio (2+%);
  2. Due to commission structures, the front end costs are very high (5-7%);
  3. The early surrender charge (before 5-7 years) is high (7+% on a sliding scale);
  4. You may be subject to excise tax for withdrawals before age 59½ if the annuity is part of a retirement account;
  5. Deferred earnings are taxed at ordinary rates at withdrawal;
  6. Annuities are taxed twice at death, as the fair market value is included in your estate; and
  7. The annuity’s guarantee of your principal and investment income is only as good as the insurance company selling it to you. No government guarantees exist on these products.

So how do you decide? Review your options with a financial advisor, but also consider your financial goals, marginal income tax rate, estate planning objectives, and appetite for risk when you compare a structured annuity product to a traditional investment.

Helping you determine your best financial approach is one of our strengths at Patrick & Robinson CPAs. We also work with several proven financial advisors, whom we can refer you to. Contact us at 904-396-5400 or

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