Most of the investment account pages on our site discuss retirement vehicles that are either set up between an employee and an employer (like a 401(k)), or directly between a wage earner and their financial custodian (like a Traditional IRA). Annuities, on the other hand, don’t fall into either of these categories.
Annuities are offered by insurance companies, and act as an arrangement between you and the company to provide a source of income in retirement. If you have an annuity, or are considering purchasing one, this page can only offer a brief overview of generic annuity functionality and the ways in which precious metals can be used to create a well-diversified retirement strategy. You should carefully consider all of your retirement options before buying any complicated financial instrument.
Below you’ll find a breakdown of some different kinds of annuities, their differences from other retirement vehicles, and the basics of investing in alternative assets via a tax-advantaged retirement account.
In simple terms, an annuity is an insurance product which can be used as a tax-advantaged investment vehicle and eventually pays out income. While there are lump-sum annuities (usually funded by rolling over another retirement account into an annuity product), most annuities are funded by making periodic payments into an investment portfolio offered by the insurance company. Years later, the owner of the annuity receives payments from the annuity in either monthly, quarterly, or lump sum payments.
Most annuities offer tax-deferred growth on earnings, much like an IRA. These tax advantages mean that annuity products are regulated by the IRS, although many rules are different than with most retirement vehicles.
One obvious advantage that an annuity offers is that there are no contribution limits. This allows forward thinking investors to potentially stock away far more money towards their nest egg. Some annuities even guarantee a certain growth rate on investment products, although there are fees associated with these services. Annuities can also be established regardless of any other accounts an investor may have open.
Annuities are rather well known for having high surrender charges and high annual fees, although this is more or less true depending on the type of annuity chosen. Annuities are also sold on commission, which means that a portion of the funds that are used to purchase the annuity never reach the account.
The technical scope of different annuity offerings is enormous; generally, however, there are three types of annuities — fixed, indexed and variable. The type of annuity that you own affects the types of investments, payouts, fees, and regulations that come with the product.
Fixed annuities offer a set, predetermined, and (usually) inflexible retirement benefit to investors. In a fixed annuity, the rate of interest on the account is set from the beginning and does not change based on the market performance of the insurance company's underlying investments.
Indexed annuities set the interest rate return on the account equal to a popular market index, such as the S&P 500 Composite. Thus, if the S&P 500 returns 8 percent on the year, the annuity would likely grow at 8% as well. There are usually both minimum and maximum returns placed on indexed annuities.
Variable annuities are actually considered securities and are regulated by the SEC. With a variable annuity, the owner chooses to invest from a range of different options, most of which will be mutual funds. The performance of those underlying investments will determine the return on the annuity.
There are other types of annuities, and hybrids between all of the above options. All of the above can either be immediate annuities, where the owner receives benefits right away, or deferred annuities, where payments must be made for a certain number of years prior to any payouts.
It is possible to transfer an annuity into an IRA, although the process for doing so depends on where the annuity was held and how much value is in the annuity.
If the annuity was previously a part on an IRA or a pension (which some qualified accounts allow for), the transfer acts like any other qualified transfer. These transfer can occur only once every 365 days, but can be completed without any tax penalties. Even if there are not tax penalties, the insurance company may charge you a substantial fee for the transfer, so it is important to check the contract.
Most annuities are not part of qualified plans, and those transfers are more complicated. If the annuity balance is over $5,500 — the 2014 limit on annual contributions into an IRA — then a complete transfer is not possible. Partial transfers are possible through an early surrender of funds, but those will likely incur surrender charges from the insurance company as well as early withdrawal penalties from the IRS if you are under the age of 59.5. Some companies do allow for up to a 10 percent penalty free withdrawal however, so check for that.
After all forms are filled out, penalties paid, and the money is received, it can then be used to open an IRA.
If you're wondering how annuities compare to IRAs, 401(k)s, and other retirement accounts, check out the chart below that delineates their differences.
|Plan Type||Sponsorship||2021 Contribution Limit||Roth Option?||Allow Gold Stocks?||Allow Gold ETFs?||Allow Gold Bullion|
|401(k)||Private Employer||$19,500 / $26,000||Yes||Maybe||Maybe||No|
|Solo 401(k)||Self-employed||$19,500 / $26,000||Yes||Yes||Yes||Yes|
|Keogh Plan||Self-employed or Unincorporated Employer||$58,000||No||Maybe||Maybe||No|
|403(b)||Government or Non-profit Employer||$19,500 / $26,000||Yes||Maybe||Maybe||No|
|457(b)||Government or Tax-exempt Employer||$19,500 / $26,000||Yes||Maybe||Maybe||No|
|SIMPLE IRA||Private Employer||$13,500 / $16,500||Yes||Yes||Yes||Maybe|
|SEP IRA||Business Owners & Self-employed||$58,000||Yes||Yes||Yes||Maybe|
|Profit Sharing Plan||Private Employer||$58,000 / $64,500||No||Maybe||No||No|
|Money Purchase Plan||Private Employer||$58,000||No||Maybe||Maybe||No|
|SARSEP||Private Employer||$19,500 / $25,500||No||Yes||Yes||Maybe|
|Traditional IRA||Individual||$6,500 / $7,500||Yes||Yes||Yes||No|
|Precious Metals IRA||Individual||$6,500 / $7,500||Yes||Yes||Yes||Yes|
|Thrift Savings Plan (TSP)||Government or Military||$19,500 / $26,000||Yes||No||No||No|
("Maybe", in this context, specifies that the eligibility requirements are vague and subject to the discretion of the account administrator.)
Gold investment options vary depending on the type of annuity. In short, only variable annuities provide the ability to select specific investments like stocks, mutual funds, and ETFs, although it is conceivable to have an indexed annuity that is fixed to a gold index.
Nevertheless, it is impossible to invest in precious metals bullion (or any other type of real assets, such as real estate or collector's items) via any type of annuity product. Indirectly, investors can gain exposure to the precious metals sector by purchasing shares of gold or silver mining stocks, or ETFs that contain these companies.
This strategy is known as buying “paper gold” and is significantly more convenient (thanks to the liquidity of stocks) but comes with many more risks. Since mining stocks are listed on digital exchanges, they are subject to extreme volatility and hasty reactions from investors who can trade securities in an instant. The same cannot be said for physical metals.
Paper gold is certainly the more convenient option, but it comes at a high cost. Investing in stocks of companies like Pan American Silver Corp. ($PAAS) or Hecla Mining Co. ($HL), or even indices such as the Gold Miners Index (GDX) or the BUGS Index (HUI), exposure your portfolio to volatility.
Often, investors want exposure to precious metals to hedge against financial market volatility, not to add to it. For this reason, investors wanting to manage risk are usually better off investing in genuine precious metals bullion than indirect exposure via gold mining or exploration companies.
Investors should also be aware of the other types of risk associated with this asset class, including:
Consider the fact that physical metals do not carry any of the risks highlighted above. In their centuries of usage as a store of value, neither gold nor silver has hit zero or even come close. These assets are the responsibility of their possessor alone and do not carry counterparty risks whatsoever.
Since time immemorial, precious metals have been sought after for their safe store of value. Unlike equities, precious metals retain their value over time and are not exposed to the same degree of volatility, market shocks, or manipulation. It's no surprise, then, why gold, silver, and platinum are used as hedges against volatility, inflation, and other negative economic phenomena.
But that's not all that precious metals offer. According to Grandview Research, the worldwide precious metals market is expected to grow at a compound annual growth rate (CAGR) of up to +9.0% between now and 2027. Those are gains that rival the S&P 500 and the Dow Jones Industrial Average on a good year.
Therefore, precious metals offer protection and growth for risk-conscious investors. Much of the momentum behind precious metals' recent growth is the fact that today's unstable stock market is creating demand for reliable alternatives such as cryptocurrencies and precious metals. However, the looming green energy revolution promised by Presiden Biden is another catalyst, since precious metals figure prominently in their adoption.
The nearer you are to retirement, the more you stand to gain from precious metals diversification. Generally, retirement investors looking to manage risk exposure dedicate between 5 and 20 percent of their wealth to precious metals. Where they land on that spectrum depends on their age, time horizon, and risk appetite. If you want to get started, open a self-directed IRA today and realize the benefits of diversification first-hand.
These days, nobody can trust the stock market or the Fed. At the rate we're going, fiat currencies will eventually undergo a devaluation event due to the rapid increase in the M2 money supply. When liquidity tightens up, the Fed stops printing money, and the stock market bubble pops, what will happen to your retirement savings?
Retirement investing through an annuity isn't enough if you want deep diversification. Fortunately, you can invest in a wide selection of safe and reliable assets if you roll over funds in your annuity to a self-directed IRA.
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