One reason why 401(k)s are so popular is because they grow tax deferred. They are taken out of your paycheck before taxes are applied, they grow in your account without being taxed at all, and then, upon retirement, your earnings are taxed. By this point, you are retired, and your taxation rate is generally much lower. This is an extremely beneficial thing, especially if you grow it for a long time and your funds are allocated correctly.
One other reason that people go to 401(k) retirement accounts is because they sometimes have employer matching. Depending upon where you work, the rate is typically around 3 percent of your paycheck that your employer will match. There is often a vesting period with this, too, which is a way for your place of employment to ensure that they are not throwing their money away at an employee that is not going to stay with the company.
Depending upon when you intend on retiring, though, there are other methods of saving for retirement that you should be using. IRAs, Roth IRAs, and annuities are all viable options, depending upon what your goals are. One interesting thing that most people don’t know is that annuities can sometimes double as an IRA. It is an annuity still, and you will still need to buy it through a life insurance company, but it has all of the properties of an IRA. It’s a little difficult to describe, but think of a car and a driver. The car is subject to traffic laws, and the driver is responsible for ensuring that that happens. The driver is also responsible for making sure that all of the local laws for citizens are also being followed. With this image in mind, you can see that the one is nestled inside of the other. The annuity is the vehicle in which the IRA is encapsulated. It is still an annuity, but it needs to follow the laws that govern IRAs, too.
Annuities have advantages that you cannot find elsewhere. Combine that with the advantages of an IRA or Roth IRA, and you will preparing for your retirement at a faster pace. You can even transfer IRAs and Roths into annuities without a penalty. On both, you cannot touch that money without a penalty until you are 59 ½, so it makes sense that they have this type of interchangeability.
But, although annuities have more in common with a retirement vehicle than they do with a life insurance policy, combining your IRAs with an annuity has a huge benefit–they allow you to have a probate free death benefit for your family. If you were to die before your retirement accounts were depleted, there would be a probate period where your estate was settled by a court of law. This process can last for up to two years, and if you have family members that you’ve been supporting or that would benefit from that money, they will have to wait. Because an annuity is an insurance policy, this money is treated like a life insurance policy upon your passing away, depending upon the riders you’ve chosen. In this light, you are able to transfer your money to a versatile retirement account, keep all of the same benefits plus get some new ones, and not be penalized at all for it.
The catch to all of this is that you should only work with an agent that you trust. You do not want to make a switch like this for the sole purpose of helping someone else make more money, especially if it has a negative impact on your earnings. Do your research, and work with a professional you trust to give you the best information.