EPS 8 - Annuities, Demystified: How They Work, When They Fit, What to Watch

Jerry unpacks annuities in plain English—what they are (tax-deferred contracts), the two phases (accumulation and distribution), and the major flavors (fixed, variable, and indexed). He covers surrender charges, fees, 1035 exchanges, how/why people annuitize (single vs. joint life, with/without beneficiary options), and common suitability pitfalls. He also explains why teachers often see annuities in 403(b)s, when annuities make sense (and when they don’t), and alternatives like IRAs/Roth IRAs.

Key takeaways

• What an annuity is: A tax-deferred wrapper with two phases—accumulation (you fund it) and distribution (you take income, often by annuitizing).

• Types:

  • Fixed = set rate for a set term.

  • Variable = invested in market subaccounts (ups/downs).

  • Indexed = interest tied to a market index with caps/floors.

• Costs & commitments: Expect surrender charges (often tiered) and various fees—know them before you sign.

• Access rules: Early withdrawals (before 59½) can trigger IRS penalties; many contracts allow ~10% free annually after year one.

• Moving money: Use a 1035 exchange (annuity→annuity) or transfer within an IRA to stay tax-deferred.

• Annuitization choices: Single life (highest payout, ends at death) vs. joint life or period-certain options (lower payout, more protection).

• Suitability matters: Great for long-term, don’t-need-soon money—not for short-term goals. Be cautious selling to very young clients unless it’s the only workplace option.

• Teachers & 403(b)s: Some districts offer annuities (and/or mutual funds). Understand the vendor lineup and costs.

• Alternatives: If flexibility is key, consider IRAs/Roth IRAs alongside or instead of annuities.