All annuities, fixed or variable, share several common advantages and disadvantages that are typically age-related. Here's a summary of those pros and cons:
Advantages for People under 60
The chief benefit of a deferred annuity for people in the accumulation phase is its tax-deferral. Funds left in the annuity are not taxed until they are withdrawn. When withdrawn, they will be taxed at ordinary tax rates.
- Annuities are also generally safe investments that are easy to start and maintain. Usually, a simple application, a check, and signature are all it takes. In many but not all states, they come with a "30-day free look period," where owners can cancel the contract if they decide it's not right for them.
- Another tax advantage of annuities is the ability to exchange one annuity contract for a new one – without paying current tax on income and investment gains. This can be useful if investors find another annuity with a more competitive rate, better payout options, or a wider selection of investment choices. At any time, owners can elect a so-called "1035 Exchange" to a different annuity contract – the provision in the Internal Revenue Code that allows this is section 1035(a) – however, care should be taken when making a 1035 exchange to avoid unintended consequences.
