The Fixed Annuity
A fixed annuity is an interest-based vehicle similar to a bank-issued CD
but geared toward retirement savings. Typically, a lump-sum of cash locks in
a 3-10% interest rate for 3-15 years. Their main disadvantage--penalty fees
from the IRS and the insurance company--is a significant factor only with
premature withdrawal.
Fixed Annuity Advantages
- Low risk
- More liquidity than CDs
- Tax-deferred
- Typically higher yields than bonds, CDs, treasuries, or money market accounts
Fixed Annuity Disadvantages
- Income withdrawals before the age of 59.5 are charged a 10% tax penalty by the IRS.
- Growth is tax-deferred, but eventually income is taxed at ordinary income tax rates.
- The insurance company usually imposes a penalty if withdrawing over the yearly allotment.
- Further monies cannot be added to the same annuity contract (although additional contracts can be purchased).
