It’s time for another edition of Dollar and Cents. This is where I answer one of your questions.
My wife and I were “sold” a joint annuity several years ago by an advisor that we’re no longer working with. We currently have a sizeable gain but we’re not very confident in the insurance company that holds the annuity. We’re considering cashing the annuity out. Does that seem like the right thing to do?
Considerations Before Cashing Out an Annuity
I see a lot of people in Mark’s situation that are disgusted with their annuities and just want to cash them out and move on. I had one client that had a decent sized annuity with Valic (used to be owned by AIG). They were so disgusted that AIG received a government bail out a few years ago that they wanted to cash out the annuity immediately. (FYI, the annuity was not sold by me).
I emphasized some of the key items to consider before cashing out an annuity but also wanted to highlight them here.
- Early Withdrawal Penalty. Cashing out your annuity before 59 1/2 could leave you with a 10% penalty. That’s never fun. Trust me.
- Taxes. And these aren’t favorable capital gain like taxes. Oh no! We’re talking ordinary income tax with is usually much higher.
- Surrender Charges. How long have you had the annuity? Some annuity contracts will last 3-15 years. Yes, 15 years! You want to verify this before cashing out and paying a stiff surrender charge.
- Forfeit Any Guarantees. Many annuities offer death benefits and income benefits nowadays. By cashing it in or doing a 1035 exchange to another annuity contract, you could be forfeiting some of these guaranteed benefits.
Be sure to do your thorough research before cashing out your annuity!
With each Dollars and Cents video we want to provide some follow up links where you can get some additional information on the topic. If you are interested in learning more on annuities here are some great reads:
- Should You Buy an Annuity? – An explanation as to why I cashed out my annuity. Good advice for younger investors.
- What You Need to Know Before Buying an Equity Indexed Annuity – 2,400+ words of in depth analysis of equity indexed annuities. A fantastic resource post if you are considering buying one of these.
- 7 Alternatives to Investing in the Stock Market – Maybe you are looking at annuities because you can’t trust the stock market. Here are some alternative investments to consider.
- 10 Low Risk Investments with High Returns – Annuities are low risk investments with decent returns. If you are looking for alternatives, I suggest looking at this list.