Financial advisor Darcy Bergen recounts the pros and cons of fixed index annuities for individual investors.
Annuities have become more prevalent in recent years, prompting more insurance companies to enter the marketplace. With so many index annuity companies offering products, it can be difficult for investors to negotiate the pros and cons of this investment choice. To help you wade through the plethora of annuities available, financial advisor Darcy Bergen has put together a list of pros and cons for your consideration. First, let’s define what a fixed index annuity is.
Darcy Bergen Explains What a Fixed Index Annuity Is
A fixed index annuity offers investors upside potential when the markets are on the rise. It also has built-in downside protection to hedge against significant declines in market indexes such as the S&P 500. Darcy Bergen, President of Bergen Financial Group, lists the top pros and cons of this investment option.
Pros of Fixed Index Annuities Per Darcy Bergen
According to Darcy Bergen, when the market is on the rise, fixed index annuities are a great investment. Here are some of the significant upsides of choosing this type of investment:
- Tax-deferred earnings. Your annuity earnings won’t offset Social Security benefits the way CDs, bonds, and other investments do.
- Index annuities can grow instead of remaining at a fixed interest rate.
- There is no contribution limit as per traditional IRAs.
- Annuity accounts don’t lose value in volatile markets. Darcy Bergen feels this is one of the significant advantages of fixed index annuities.
- You can rollover a 401k into an index annuity without paying taxes.
Cons of a Fixed Index Annuity Per Darcy Bergen
Here are a few disadvantages of investing in a fixed index annuity pointed out by Darcy Bergen:
- If you withdraw an index annuity before turning 59 ½, you receive a 10% penalty from the IRS.
- If you have gains, the IRS taxes them as ordinary income. If your fixed index annuity were taxed as capital gains, the rate is considerably lower.
- You pay an extra fee for riders. Optional riders may include things like protecting you against loss in case of a market crash.
- Darcy Bergen points out that these annuities also charge a fee for excessive withdrawals. Typical fees range from 5 to 10% for early withdrawal on a regular annuity.
Darcy Bergen Explains How Index Annuities Work
Index annuities earn interest when a particular index performs well. Many indexes use the S&P 500. Issuers credit interest on your contract anniversary with a guarantee of no net loss of principle.
If the market index decreases, you simply receive 0% interest. So, maybe you don’t make money, but you don’t lose your original principle either. However, if the applicable index rises, so does your interest rate on the annuity.
Darcy Bergen suggests fixed index annuities if the following conditions apply:
- You want guaranteed retirement income.
- You want an opportunity to earn more than with a fixed CD.
- You max out traditional IRA and 401K contributions and are looking for other tax-deferred opportunities to invest.
- You have reached retirement age and want to minimize your risk of return.
Darcy Bergen can offer additional advice for investors seeking help with their wealth management.
Investment advisory and financial planning services offered through Simplicity Wealth, LLC, a Registered Investment Advisor. Sub-advisory services are provided by Advisory Alpha, LLC, a Registered Investment Advisor. Insurance, Consulting and Education services offered through Bergen Financial Group. Bergen Financial Group is a separate and unaffiliated entity from Simplicity Wealth and Advisory Alpha.
Although external indexes may affect contract values, a market downturn cannot reduce your credited interest or principal. The contract does not directly participate in any stock, bond, or investments. The market index value does not include the dividends paid on the stocks underlying a stock index. These stock dividends are also not reflected in the interest credited to your contract.
Guarantees are backed by the financial strength and claims-paying ability of the issuing company.
This material is intended for educational purposes only and is not intended to serve as the basis for any purchasing decision.