Annuity Pitfalls

Annuities are useful investments, but there are pitfalls as well. Avoiding or minimizing these problem areas only occurs with education about how annuities work. By understanding the disadvantages or annuities, you can protect yourself.  The various pitfalls include investing at the wrong age, choosing the wrong annuity, and not knowing about the costs of owning an annuity.

Investing at the wrong age

If you invest in an annuities in your 30s or 40s and start receiving distributions before age 59 ½, the IRS charges a 10 percent tax penalty on any income withdrawals. You also have to pay tax on the earnings.

Picking the wrong annuity

Picking the right annuity (link to new piece of content, wll be good for SEO) is a critical component of a solid diversified investment strategy. With so many annuities available, it may be difficult to choose the right one for your needs. But if you choose the wrong one, you may outlive the money. To get the best annuity for your situation, you have to assess your financial needs and goals and understand the advantages and disadvantages of any annuity you are considering.

Investing in the short-term

Annuities work best as long-term investments. You should never invest in an annuity using money you need for the short-term such as for rent or mortgage, groceries or utility bills. The only money you should put into annuities is money you won’t need for at least seven to ten years.

Early withdrawals

Most annuities have early withdrawal penalties. This is especially true if you withdraw any funds before age 59 ½. There are tax issues as well. If you withdraw the money too soon, the tax is no longer deferred. Depending on several factors, you may have to pay capital gains tax on any money that you withdraw from the annuity. There are probably other fees as well. Learn about the fee structure of any annuity you want to purchases.

High Surrender Charges

The surrender charge is another penalty. Many financial institutions impose surrender charges if you withdraw funds early or cancel the annuity contract within the first five to 10 years. To avoid such charges shop around for annuities without this penalty or have low surrender charges. Reading the contract carefully also avoids any surprises later.

Expenses and fee structures
In addition to early withdrawal and surrender fees, there are general annuity costs as well. All annuities come with fees and charges. Many also come with commissions to the person setting up the annuity. These charges and fees vary greatly among financial firms. The higher these costs, the more they impact the return on investment. To get an annuity with the lowest costs, you have to do your homework

Failing to name beneficiaries

Many annuities offer death benefits. This means that upon your death your beneficiary gets the distributions. But if you don’t name a primary and contingent beneficiary, and you have an insurance company set up the annuity, the insurance company can take possession of the funds in your annuity.


Taxes can be a major pitfall for annuity owners. Many annuities are tax deferred. This means no taxes are due on the money in the annuity until you start receiving distributions. At that point the money is taxed as regular income and not as capital gains. However, the Internal Revenue Service (IRS) imposes restrictions on how you can withdraw your money. In some cases withdrawing funds leads to heavy penalties and taxable income.
With any investment, there are pitfalls, especially if you choose the wrong investment for your financial situation. Annuities are no exception. There are many pitfalls to investing in the wrong annuity or investing money you will need in the short-term. The best solution is to choose wisely.