Non-qualified annuities have some disadvantages to people under age 60:
- Among the disadvantages of deferred annuities can be high expenses (almost one percent more a year than mutual funds), high surrender charges during the initial years of a contract, and the tax burden they can impose on the owner's heirs.
- If income is withdrawn before age 59 1/2, the IRS will usually impose a 10 percent penalty, in addition to ordinary income tax. The insurer may also impose its own early withdrawal penalty. Small amounts, such as 10 percent may be withdrawn annually without any penalty from the insurer, but the IRS penalty still applies, since it views all withdrawals as income until all income has been paid out.
- Non-qualified annuities are funded with post-tax dollars. Before buying an annuity, it may be better to maximize pre-tax contributions to retirement plans such as IRAs, 401(k)s or 403(b)s.
- Deferred annuities are long-term accumulation vehicles intended for retirement savings. They may not be a good choice for younger investors looking for liquidity. Money that may be needed for current expenses should not go into an annuity.
- Annuities are not as portable as some other interest-bearing vehicles because the deferred tax on gain requires documentation when transferring to another tax-deferred vehicle or annuity company.
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