Key strengths
• You receive “free” money if your contributions are matched by your employer
• You decide how much to save (within federal limits) and how to invest your 401(k) money
• Your regular 401(k) contributions are made with pretax dollars
• Earnings accrue tax deferred until you start making withdrawals, usually after retirement
• Once you are no longer at your former employer, you may transfer your 401(k) to another investment program, including annuities
• You may qualify for a partial income tax credit
• Plan loans may be available to you
• Hardship withdrawals may be available to you, though income tax and perhaps an early withdrawal penalty will apply, and you may be suspended from participating for up to six months
• Savings in a 401(k) are exempt from creditor claims in bankruptcy (but not from IRS claims)
Bear in mind…
• 401(k)s do not promise future benefits; if your plan investments perform badly, you could suffer a financial loss
• If you withdraw the funds prior to age 59½ you will have to pay a 10% early with drawal penalty (in addition to ordinary income tax)
• The IRS limits the amount of money you can contribute to your 401(k)
• Unless the plan is a SIMPLE 401(k) plan, you may have to work for your employer up to five years to fully own employer matching contributions.
Annuities
Key strengths
• Interest generated by an annuity accrue tax deferred until withdrawn
• You can receive payments from the annuity for your entire lifetime, regardless of how long you may live*
• There are normally no contribution limits
• There are many different types of annuities to choose from
• You pay taxes only on the earnings portion of annuity payments
• At death, proceeds from an annuity pass free from probate to your named beneficiary
Key tradeoffs
• May have surrender charges
• Contributions are not tax deductible
• Once you elect a specific distribution plan, annuitize the annuity, and begin receiving payments, that election is usually irrevocable (with some exceptions)
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An annuity is a contract between you and an insurance company. In its simplest form, you pay a premium in exchange for future periodic payments to begin immediately (an immed-iate annuity) or at some future date (a deferred annuity) and to continue for a period that can be as long as your lifetime.
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