Consider Fixed Annuities for Your Client’s Fixed-Income Portfolio

Interest from corporate bonds and Treasuries is taxable in the year it's received. Annuities are tax-deferred.

All interest earnings left inside the contract grow and compound tax-deferred until withdrawn, a significant tax-planning benefit. The client can wait until retirement, when the client's tax bracket is likely to be lower, to start receiving payments.

Many corporate and municipal bonds are callable. When rates are high, it may look like the client has nailed down a great deal. However, a few years later when rates are lower, the issuer may call the bond back and the client will have to reinvest the proceeds at a lower rate.

Annuities can't be called. The interest rate is set for the duration of the guarantee period.

Annuities offer the ability to create a guaranteed lifetime income stream via annuitization. It's the only financial product that offers this option. 

There are a few downsides to fixed annuities.

First, they have less unpenalized liquidity than bonds and bond funds.  The client can always cash them in, but they'll pay a penalty for early surrender. Second, interest earnings withdrawn prior to age 59½ may be subject to a 10% IRS penalty.

Because annuities have less liquidity than bonds, the client would probably not want to put all fixed-income investments in annuities.

But there is some liquidity, through annuity features that let policyholders withdraw up to 10% of the principal a year penalty-free, for example. They're thus more liquid than bank CDs, which have stiff penalties for early withdrawals.

When helping your clients invest the fixed-income part of their portfolio, don't consider only bonds. Adding fixed annuities to the portfolio is often a superior solution.

— Read Rare good news from the DOL (yes, about retirement investing)on ThinkAdvisor.