Tax Sheltered Annuities - are they EVER a good idea?

[spidey07]

I know just about nothing about them but I do listen to financial shows and the overwhelming opinion is "not worth it, horrible return". Well, from what I've seen with a friend that has one it is HORRIBLE. They've contributed to this TSA for 20 years and the value of it is only 13% more than what they've put in.

The other thing I've heard is that a TSA is the only guaranteed income no matter how long you live in retirement, no matter what?

Can anybody school me on why they shouldn't cash this out, eat the piss-poor gains and go somewhere else? Granted I'm sure there are different ones and different terms.

 

[FleshLight]

They tend to be high commission products for the agents selling them. They only make sense once you've exhausted all other tax shelters like 401k, FSA, IRA, life insurance and you want a conservative low risk guaranteed source of income. There are some decent ones out there but 13% growth over 20 years does not sound like one of them.

 

[spidey07]

They tend to be high commission products for the agents selling them. They only make sense once you've exhausted all other tax shelters like 401k, FSA, IRA, life insurance and you want a conservative low risk guaranteed source of income. There are some decent ones out there but 13% growth over 20 years does not sound like one of them.

Thanks, very concise and what I've heard from financial planners. They have a very specific purpose, extreme low risk at the expense of any return/growth. A lot of people on the financial planner shows is folks saying "what the hell do I do with this thing?"

Any thoughts on cashing it out? What are the tax implications of doing so?

 

[glenn1]

As FL pointed out, they can be good for those who have maxed out other tax-advantaged ways to save money, and can be useful in estate planning purposes if you elect riders like period certain payments or a death option. You also need to distinguish between types of annuities; there's huge differences between fixed or variable types, single or joint/survivor types, immediate or deferred, and other flavors. If you're concerned about outliving your retirement savings, annuities may be a reasonable option also.

In short, annuities are a tool; useful for some purposes, and possibly dangerous if misused. As with any investment product, you need to perform due diligence and actually understand what you're buying before pulling the trigger.

 

[sactoking]

In short, annuities are a tool; useful for some purposes, and possibly dangerous if misused. As with any investment product, you need to perform due diligence and actually understand what you're buying before pulling the trigger.

This. Annuities can serve a purpose, even ones with low rates of return. Case in point:

If an elderly couple consists of one person in need of long-term care and one person that is self-sufficient, the costs of the long-term care can easily cause them both to go broke. If they try to qualify for Medicare they will be means-tested for both income and assets; the assets means test is much more strict than the income means test. If they try to purposely divest assets through gifts (as opposed to spending them) they could be barred from Medicare for up to 36 months and any advisors who told them to do so could face criminal and financial penalties. So, what do they do? Have the spouse in need of care use their half of the assets to purchase a tax-sheltered annuity for the self-sufficient spouse. The spouse in need of care will pass the Medicare means test and the self-sufficient spouse will at least realize some return from the assets that had to be sold.