What Retirement Account is Best For You: an Annuity or a $401(k)?
Read Below to Find Out The Pros and Cons to Both
Saving for your retirement means considering your personal needs and judging what will be best for your future security and happiness. There many different ways to save between retirement accounts and plans for with annuities and 401 (k) plans being among the most popular and strong of those accounts. Annuities and 401(k) accounts are very similar in how they operate with your money though there are differences as well as different time frames that can maximize your profits.
Comparing the Annuity with the 401(k)
A 401(k) vs. annuity means having similar accounts with different pieces. A 401(k) account is frequently set up by some employers for their employees. Both parties contribute money to it generally matching or giving a percentage of what is contributed monthly from your paycheck. These are tax-free accounts that you delay payment on until you start drawing out funds. The exception to this is the Roth 401(k) which gets taxed as it is going into your account.
A 401(k) account is made up of mutual funds, exchange-traded funds or other select investments. When you retire with a 401(k) and start drawing on its funds is when it gets taxed. This helps pay for your retirement with an account that has been allowed to grow with untaxed funds. If your funds are invested in a Roth IRA then you will not need to pay taxes when you withdraw funds as it has already been taxed.
An annuity is placing your money in a life insurance policy held by a life insurance company. Your money is put into investments and you are paid a certain amount every month based on how you have set allowed the account to be set up. Generally, you are investing a large sum or over time you are making small payments so you can receive payments late. This kind of contract guarantees the insurance company will pay you regularly when you retire and will continue until you pass away.
An annuity is often purchased with after-taxed money so when you withdraw it, you will not need to pay taxes on it. The taxes you will be paying on it are only on the interest that is generated on it over time because the initial amount invested has already been taxed. This is true except for funds purchased with pre-taxed money then the entire account is taxed.
A 401(k) is one that is attached to an account set up by your employer. This is not something just anyone can sign up for like an annuity. Someone who is self-employed can set up their own 401(k) if they choose, but most people cannot just set one up. There are fees included in a 401(k) account and a lot of them are determined when you set it up through your employer. You can ask your Human Resources department for an explanation for any fees on your account. Annuity fees are generally and more difficult to understand. They are more likely to have high fees for commissions and riders.
If you have to access your 401(k) before the allowable date of age 59 ½ that you will have a penalty placed upon the account up to 10 percent in addition to any income taxes that are still pending on the amount that was removed. There are similar fees on annuities for early withdraws and surrender fees. A surrender fee is a fee you have to pay because of early account access. This usually disappears after a five year period.
As a holder of a 401(k) account, you can borrow from it if you need to and repay as you go. This is a function only available to a 401(k) this is not something that can be done with an annuity. Annuities also have regular payments that are unchanging so inflation protection is not needed.
What makes a 401(k) really unusual is it can be inherited by anyone of your designation. Some annuities allow you the benefits of a life insurance policy which can make them inheritable if you purchase the ability for your heirs to inherit it. S
Withdrawing Funds from Annuities and 401(k)s
Annuities will give you a payment for as long as you live which means you will never run out of money. A 401(k) does not. It will only give you the amount that is in the account plus the interest that it generated. This means that if the stock market has a downturn your 401(k) does as well whereas the annuity payments will stay consistent regardless of the market’s actions. This only applies to annuities that were set up with fixed interest amounts. These types of accounts will always pay consistently, but will not increase in value if the market does or decrease if it decreases.
There are no limits on the amount of money you can contribute to an annuity each year. There are limits on a 401(k) though. For the 2019 year, you can only contribute $19,000 to your 401(k) which means after you and your employer have met the limit for the year, nothing more gets contributed. If you are over the age of 50 you can contribute up to $25,000 a year, but it still stops after you have met the allowable limit. An annuity has no limit to the amount you can contribute a year. If you put the maximum amount allowable into your 401(k) you can take the rest and put it into an annuity.
Final Thoughts
Annuities and 401(k)s are both good accounts for saving for retirement. You can also do a lot with a traditional IRA or a Roth IRA. The key is working to save and put the maximum allowable amount in all of them or in the case of an annuity, put in all you can each year. Being on top of your savings means you will have a secure retirement without having to worry about living off of your social security. This fund was designed to supplement your savings and most people have trouble living on them.
