If you’ve already maxed out your 401(k), opened a backdoor Roth IRA, and still have investable income left over, you may be wondering: What’s next? For high-income earners, the challenge isn’t just saving. It’s optimizing growth, long-term. One option that often enters the conversation (and sparks debate) is the annuity.
According to LIMRA, total U.S. annuity sales reached a record $385 billion in 2023—an 18% increase from the previous year. However, annuities remain one of the most misunderstood tools in financial planning services, especially for affluent individuals trying to find the balance between risk and security.
Understanding Annuities: The Basics
An annuity is a contract between you and an insurance company. You pay either a lump sum or a series of payments, and in return, the insurer promises to provide income, either immediately or in the future.
Annuities come in several types:
- Fixed annuities offer guaranteed returns and predictable payouts.
- Variable annuities allow market exposure but introduce risk and fees.
- Indexed annuities tie returns to a market index, capping both potential gains and losses.
High-income earners often use annuities to round out their retirement income or provide a measure of protection that traditional investments may not offer.
Benefits of Annuities for High-Income Earners
Annuities shine brightest when traditional retirement tools have been exhausted. If you’re looking for security, tax deferral, and long-term income, these features stand out:
1. Tax-Deferred Growth
Annuities allow your investment to grow without annual taxation. This becomes especially valuable when you’ve already maxed out tax-advantaged plans and are looking for additional shelter.
2. No Contribution Limits
There’s no IRS cap on how much you can invest in an annuity. That flexibility makes them a strong option for those earning well above contribution limits for IRAs or Roth IRAs.
3. Guaranteed Lifetime Income
Annuities create a pension-like stream of income for life, giving you peace of mind even in a volatile market.
4. Asset & Creditor Protection
In many states, annuity assets are protected from creditors or lawsuits. While this varies by jurisdiction, it can be a valuable layer of defense for high-liability industries.
Used strategically, annuities can complement other wealth management strategies, not replace them.
The Drawbacks: What to Watch For
Of course, no option is perfect. These are the primary disadvantages that high-income earners should weigh carefully:
1. High Fees & Complexity
Annuities often come with layered fees: mortality and expense charges, rider costs, and administrative expenses.
2. Illiquidity
Accessing funds before a set period can trigger steep surrender charges. This makes annuities less suitable for individuals who want flexibility or need money in the short term.
3. Taxation of Earnings
While the growth is tax-deferred, withdrawals are taxed at ordinary income rates, not the more favorable capital gains rate.
4. Lower Return Potential
The guarantees that make annuities attractive can also limit upside potential, especially when compared to equity-based investments.
Knowing both the benefits of annuities and their limitations should help you decide if they’re the right choice for your financial situation.
Who Should Consider an Annuity?
Annuities make the most sense for individuals who:
- Have already maximized traditional retirement vehicles
- Need a guaranteed income stream in retirement
- Want to reduce exposure to market volatility
- Are comfortable locking up capital in exchange for protection and structure
Exploring the Alternatives
If annuities aren’t the right fit, consider:
Mega Backdoor Roth IRA
- Allows high earners to contribute after-tax dollars to a Roth account via a 401(k)
- Enables tax-free growth and withdrawals
- Requires specific employer plan features
Taxable Brokerage Account
- Offers liquidity and access to a wide range of investments
- Earnings are taxed at long-term capital gains rates if held over a year
- No contribution limits or early withdrawal penalties
Comparing these options side-by-side can help ensure your wealth management strategy is both flexible and tax-efficient.
Making the Right Choice
Annuities can be a smart tool—if they fit your goals. At Goldstein Financial, we help high-income earners make informed, personalized decisions that support long-term stability.
Schedule a consultation with Goldstein Financial to explore all of our financial planning services and find out whether annuities are right for you.