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Q. Do all annuities have fees?

Posted by: Sharon B.
A. No, not all annuities have fees that the investor has to pay. Regardless of what some so-called experts will tell you. But to fully answer the question, we need to split annuities into two camps: fixed and variable. Fixed annuities have no fees. When you invest in a fixed product, 100% of your deposit amount goes to work for you. Any commissions on the sale are paid directly by the insurance carrier. There are two primary types of fixed annuities: CD-type savings vehicles called fixed deferred annuities and income-paying vehicles called immediate annuities. In both of these cases, there are no fees taken out of your initial deposit. Variable annuities, on the other hand, do come with fees. It's not uncommon to see annual expenses of 2% or more on these types of products. If you're thinking of purchasing a variable product, read the prospectus carefully and be sure you understand all of the fees associated. Penalties/surrender charges are another matter. Like any type of investment -- even a simple savings bond -- penalties can and will be incurred if you don't follow the rules. That's why it's critical to understand how and when you can access your money in an annuity. Heck, that's just good advice for any investment. If you've not yet seen it, you'll want to check out our free ebook on the Seven Mistakes Annuity Investors Make. Not understanding the fees and expenses is a big part of that, as are the penalties for accessing your money too early. I'll close with this: fixed annuities are pretty simple to understand. Most aren't overly complex. Hence, there's no need to charge fees to keep the accounts going. They just... work. Variable annuities are another matter all together since they are tied to the performance of the sub-accounts (mutual funds). They take a lot of work. Hence... fees. But just so we are clear -- not all annuities come with fees. Make sure this is the case for yours.

Q. I am 68 years old and retired. I lost over half of my money in the stock market. My advisor suggests I invest in a fixed annuity with a 10% bonus to get back some of my losses. It sounds too good to be true.

Posted by: Paul G.
A. When an insurance company is offering rates far above what most other annuities are paying and it sounds too good to be true -- it probably is. This old saying never loses it's truth. Some companies offer bonuses on the initial contribution as away to lure you in. We refer to these bonuses as bait. Also, be aware that they might pay lower returns in susequent years. Most bonus annuities come with longer surrender periods -- the time you have to wait before you can access your money -- and higher surrender charges -- the penalty you pay for taking your money out early. And if that's not enough, they normally payer higher commissions to the agent. So a big bonus up front to you, a big commission check to the agent... that's a lot of profits taken out already. Remember that the insurance company is in this to make money. They'll find ways to make sure they come out ahead in the end. This is one of the seven mistakes that we address in our free report How To Avoid The Seven Mistakes Annuity Owners Make. I would encourage you to read the report before making any decisions to invest in an annuity. You'll find it to be a very helpful guide.

Q. Is the loss on a Variable Annuity deductible?

Posted by: Pearl R.
A. You might think that this would be treated as a capital loss, to be reported on Schedule D with other investment losses, but that's not quite the case. Annuity losses are ordinary losses. There is little guidance from the IRS regarding losses on annuities. Recently, the IRS added a sentence in Publication 575, Pension and Annuity Income, page 20, that address this. First, you must cash out or otherwise surrender the entire contract to realize and deduct the loss on a non-qualified deferred annuity. You then can claim it as a miscellaneous itemized deduction on Schedule A. But that schedule allows you to deduct only the portion of the loss that exceeds 2% of your adjusted gross income (AGI). If you exchange your current annuity for another one using the provisions found in Code Section 1035, any gain or loss on the prior annuity will simply follow you into the new one, and you'll have neither income nor deductions to report on the exchange. And, it can get worse. Miscellaneous itemized deductions subject to the 2% floor are added back to gross income to determine Alternative Minimum Tax (AMT). So claiming the loss as a miscellaneous itemized deduction is a tough route no matter what. And if you don't itemize deductions, you'll be subject to the 2% hit and the standard deduction. This can be very confusing. It may be wise to consult a professional tax practitioner before making any financial decisions.

Q. What is the average commission percentage paid to the agent, and does it vary from a fixed or a variable annuity?

Posted by: Gordon S
A. Commissions can range from 1% to well over 10% of the initial deposit. And yes, the commissions structure on a fixed annuity is quite different from that of a variable annuity. It's difficult to get to an average. To make things even more complicated, variable annuities usually call for the agent to choose the commission option. If Option A is selected (and yes, that's the official name), the agent receives all of the commission up front in one lump sum. Option B nets the agent a smaller upfront payment -- perhaps 75% of the sum for Option A. The agent then receives additional commissions, known as trails, for either a set period of time or for the life of the contract. Option C causes the agent to receive even less up front -- maybe only 50% -- but see significantly larger trails.

Q. With the stock market declining, is it a good time to invest in an Index Annuity?

Posted by: June B.
A. We really don't have enough information to give you a specific answer. An Index Annuity was designed to track an index, such as the Standard and Poor's 500 index. The return you'll receive on your money will usually be a percentage of what that particular index gained for the corresponding investment year. If you're willing to give up some of the upside potential, then you can protect yourself against downside risk. We will caution you, that an Index Annuity can be complex. It has many internal moving parts, such as participation rates, interest rate caps, spreads, various indexing methods and much more. So, you should obtain as much information as possible before making any decisions. You may want to visit these regulatory sites, www.sec.gov and www.finra.org for additional information.

Q. I am 63 years old and employed full time. I am eligible to collect Social Security but I do not need it at this time. Should I start or wait?

Posted by: Herb A.
A. If you feel your employment is secure and do not need the money, it may be wise to wait. You'll receive a permanently lower monthly benefit by starting to collect prior to normal retirement age. If you continue to work and start your benefits, you could decrease your benefits by $1 for every $2 you earn above $13,560 in 2008. Waiting to start your benefits on or after your normal retirement age will not subject you to this penalty. In addition by continuing to work and collecting your benefits, your increased income may result in you paying higher income-taxes.

Q. My broker is trying to talk me out of purchasing a fixed annuity. He told me that they have hidden fees. Is this true?

Posted by: Tina F.
A. No. There are no sales fees, no contract fees, no expense charges, no annual fees, or management fees of any kind. 100% of your investment goes to work for you immediately. Some annuities guarantee the interest rate from the day it is received until the end of the guaranteed period. Very simply, the quoted rate is the rate you will receive. The only charges that may be incurred would be an early withdrawal penalty beyond any "free withdrawal" amount the annuity may allow. The free withdrawal policies and the early withdrawal penalties are clearly shown in the information sheet of each annuity. Any withdrawals made prior to 59.5 may be subject to a 10% penalty tax from the federal government.

Q. Does the beneficiary of an annuity have to pay tax?

Posted by: Bill L.
A. Unfortunately, tax-deferred annuities are subject to income tax. In some cases where your estate exceeds allowed credits, federal estate taxes may be due as well. Upon the annuitant's death, the beneficiary becomes liable for the income tax on any gain paid out of the contract. An exception to this rule would be if the beneficiary is the owner's spouse. The surviving spouse can continue the contract without incurring current taxation. However, if the surviving spouse elects to continue the contract, then upon his/her death, the named beneficiary becomes liable for the income tax on any gain paid out of the contract. Keep in mind, the proceeds of an annuity go directly to your named beneficiary, thereby avoiding the costs, delays, and publicity associated with probate. However, one can transfer wealth efficiently to their named beneficiary by using the annuity to fund the purchase of a life insurance policy. This technique can be very effective, but you should seek professional advice before making any decisions.