Would it be wise to open a Roth IRA and contribute the max $5,000 this year? Can I open a traditional IRA (not contribute to it any more) and open a Roth IRA (which I will contribute to) in the same year?
Yes, you can open a traditional as well as a Roth IRA in the same year. But, the contribution limit for traditional + Roth is $5,500 for 2015.
Consider these additional items:
- You and your spouse can both have separate IRA accounts, which would allow you to save $11,000 among the two of you via IRA accounts, if you wish.
- If your employer's 401(K) has good investment selections (low cost, index funds) it may be desirable for you to contribute if you wish to save more, as the limit is up to $18,000 for employer sponsored plans.
- The combination options give you flexibility, but you need to evaluate the tax and tax saving consequences, so be sure to check with your tax advisor for the best approach for your goals.
WHAT IS AN ANNUITY?
An annuity is an insurance product that pays out income, and can be used as part of a retirement strategy. Annuities are a popular choice for investors who want to receive a steady income stream in retirement.
Here's how an annuity works: you make an investment in the annuity, and it then makes payments to you on a future date or series of dates. The income you receive from an annuity can be doled out monthly, quarterly, annually or even in a lump sum payment.
The size of your payments are determined by a variety of factors, including the length of your payment period.
You can opt to receive payments for the rest of your life, or for a set number of years. How much you receive depends on whether you opt for a guaranteed payout (fixed annuity) or a payout stream determined by the performance of your annuity's underlying investments (variable annuity).
While annuities can be useful retirement planning tools, they can also be a lousy investment choice for certain people because of their notoriously high expenses. Financial planners and insurance salesmen will frequently try to steer seniors or other people in various stages toward retirement into annuities. Anyone who considers an annuity should research it thoroughly first, before deciding whether it's an appropriate investment for someone in their situation.
WHAT ARE THE DIFFERENT TYPES OF ANNUITIES?
There are two basic types of annuities: deferred and immediate.
With a deferred annuity, your money is invested for a period of time until you are ready to begin taking withdrawals, typically in retirement.
If you opt for an immediate annuity you begin to receive payments soon after you make your initial investment. For example, you might consider purchasing an immediate annuity as you approach retirement age.
The deferred annuity accumulates money while the immediate annuity pays out. Deferred annuities can also be converted into immediate annuities when the owner wants to start collecting payments.
Within these two categories, annuities can also be either fixed or variable depending on whether the payout is a fixed sum, tied to the performance of the overall market or group of investments, or a combination of the two.
ARE ANNUITIES TAX DIFFERED?
Yes. Money that you invest in an annuity grows tax-deferred. When you eventually make withdrawals, the amount you contributed to the annuity is not taxed, but your earnings are taxed at your regular income tax rate.
WHAT ARE THE ADVANTAGES OF ANNUITIES?
The biggest advantages annuities offer is that they allow you to sock away a larger amount of cash and defer paying taxes.
Unlike other tax-deferred retirement accounts such as 401(k)s and IRAs, there is no annual contribution limit for an annuity. That allows you to put away more money for retirement, and is particularly useful for those that are closest to retirement age and need to catch up.
All the money you invest compounds year after year without any tax bill from Uncle Sam. That ability to keep every dollar invested working for you can be a big advantage over taxable investments.
When you cash out, you can choose to take a lump-sum payment from your annuity, but many retirees prefer to set up guaranteed payments for a specific length of time or the rest of your life, providing a steady stream of income.
The annuity serves as a complement to other retirement income sources, such as Social Security and pension plans.
WHAT INVESTMENT OPTIONS DO ANNUITIES HAVE?
It depends on which type of annuity you have. If you choose a fixed-rate annuity, you are not responsible for choosing the investments - the insurance company handles that job and agrees to pay you a pre-determined fixed return.
When you opt for a variable annuity, you decide how to invest your money in the sub-accounts (essentially mutual funds) offered within the annuity. The value of your account depends on the performance of the funds you choose. While a variable annuity has the benefit of tax-deferred growth, its annual expenses are likely to be much higher than the expenses on regular mutual funds - so ordinary funds may be a better option.
What happens to my annuity after I die?
It depends on the type of annuity and how your payouts are calculated. There are several different methods. You do have the option of naming a beneficiary on your annuity, and with certain types of payout options that beneficially could receive the money in your annuity when you die. Other options just pay out during your lifetime, and the payments stop when you die.
Should I exchange my existing annuity for a new one?
Read all the sales documents yourself and make sure you are aware of every potential fee. Never rely on the salesperson's explanation alone.
Be especially cautious if anyone suggests you exchange your existing annuity for a new annuity. Annuity exchanges are known as 1035 swaps, after the section of the IRS code that regulates them. A salesperson may tell you a 1035 swap is a great deal, because it allows you to get the features of a new annuity without incurring any taxes. What you might not be told is that the exchange earns a fat sales commission for the insurance agent.
What's more, by moving into a new annuity, you will start a new surrender period. For example, say you have owned an annuity for 10 years. You probably could close out your account without paying a surrender charge. But if you swap that annuity for a new one, you will be hit with a surrender charge of about 7% to close the account within the next seven years or so. You can learn more about annuities, and how to protect yourself, at the Securities and Exchange Commission Web site
What if I bought an annuity I no longer want?
You can ask to surrender the annuity. If you have owned the annuity for less than seven years or so, you may have to pay a surrender charge. That fee can start at around 7% if you pull out in the first year you own the annuity, and then it typically declines by one percentage point a year until it disappears after seven or eight years. You also will have to pay income tax on all the investment earnings in your annuity, and if you are younger than 59 ½ you typically will be hit with a 10% early withdrawal penalty courtesy of the IRS. Alternatively, you can opt to transfer your money to another annuity in what is known as a 1035 exchange. The surrender charge, if any, still applies, but you won't incur any tax or penalty. But this method has some risks, as you might have to pay another sales commission, and your surrender clock can also start over again.
