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Chapter 16. Tax-Sheltered Annuities > The Real Costs of Owning an Annuity - Pg. 161

Tax-Sheltered Annuities 161 Which option you choose will depend upon your lifestyle, health, marital status, and even gender (women normally live longer than men). The more guarantees the insurance gives an annuitant, the smaller the payment will be. Do your homework, for once a choice is made, it is cast in concrete, and you can't go back and change it. · Joint and survivor option--This option guarantees income payments for two people for life. If one of them should die, the other would still continue to receive payments, usually a lesser amount, but the survivor will not outlive the income stream. This is ideal for a married couple, because with all of the other payout options the beneficiary could easily outlive the income payments. There are several variations on this option as well, so check them out carefully and always discuss them with your life partner. The Real Costs of Owning an Annuity No free lunch here. As with any financial product, there are costs attached, and some of them get hidden. Because there is an insurance product as part of the investment product, you must pay for it. You do get a guaranteed death benefit and a lifetime income guarantee, but you also pay for them. These fees may amount to two percent or more annually. And then there are the administrative charges, for someone has to take care of all the paperwork, and that can cost anywhere from $25 to $75 a year. Oh yeah, if you've invested in mutual funds, you gotta pay the managers of these funds as well, and that can be another one or two percent a year, referred to as investment man- agement expenses. Then, of course, that nice sales person who convinced you an annuity was the best thing since sliced bread, well, he or she gets a commission, and sometimes it comes out of your principal. For What It's Worth When you begin your income payments from your annuity, you will not be taxed on the money you contributed. The insurance company will figure how much of each payment is return of principal and how much is interest. It is the interest that you will owe income taxes on. Here are some more things to remember. If you sign a contract to purchase an annuity, you may have just signed a document that says you can't get your money back unless you pay the insurance company for the privilege. The insurance company normally can levy a back-end surrender charge, and most do. The norm here is a seven percent surrender charge for seven years, decreasing annually until it is at zero. But we have seen charges as high as 10 percent that never go away, so read the small print of the contract carefully and understand what you are signing. In defense of the insurance companies that levy this fee, they will tell you they do this so that they have the ability to make long-term investments on your behalf, and they don't have to worry about redemptions. Now let's not forget those fellows in Washington. For you to get tax deferral compounding, you must give them your word that you are saving for your retirement. So in order to make sure you keep your end of the deal, they levy a penalty of 10 percent on you if you renege. The IRS uses fear as a way to keep us taxpayers in line, and it actually works.