12 Jul Running out of tax-deferred options?

Q. I save the max to my 401(k) and also to a Roth IRA. I have another $400 a month I can afford to invest and I want something tax-deferred. Should I consider an annuity or other life insurance product for the investment? I already have enough term insurance.
— Saver

A. You are clearly a good saver so kudos to you, but unfortunately, your choices for additional tax-deferred savings are limited.

You mentioned annuities and life insurance policies that have a cash value component, and these can be a good way to build tax-deferred savings, said Brian Power, a certified financial planner with Gateway Advisory, LLC in Westfield.

He said if you feel you already have enough life insurance, an annuity could be a better choice because all of your contributions would go towards the accumulation bucket and not have to be used to pay for a death benefit.

“Some annuities will add a death benefit rider for additional fees but you wouldn’t need that rider,” he said.

For your purposes, you should look for a low-cost annuity that offers an investment menu with low-cost options, Power said.

“Also, be careful not to use an annuity in which your money would be locked up for years,” Power said. “Many annuities – usually the ones sold by insurance agents and investment brokers – will have a contingent deferred sales charge if you terminate the annuity prior to a certain amount of years.”

This allows the annuity company to recapture the commissions it paid to the annuity salesperson, Power said, but there are annuities that do not have these tie-up restrictions.

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