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Typically you should consider an annuity only after you have maxed out other tax-advantaged retirement investment vehicles, such as 401(k) plans and IRAs. If you have additional money to set aside for retirement, an annuity's tax-free growth may make sense - especially if you are in a high-income tax bracket today. Note that while an annuity may be offered as an option within your IRA, that rarely makes sense, since the IRA is already tax-deferred.

Annuities have some significant drawbacks. For one, you must be willing to sock away the money for years. If you make a withdrawal within the first five to seven years and you typically will be hit with surrender charges of up to 7% of your investment or more. Annuities frequently charge other high fees as well, usually including an initial commission that can be up to 10% of your investment. If you purchase a variable annuity, ongoing investment management and other fees often amount to 2% to 3% a year.

These fee structures can be complex and unclear. Insurance agents and others who sell them may tout the positive features and downplay the drawbacks, so make sure that you ask a lot of questions and carefully review the annuity plan first.

Before you invest, you should compare that fee structure with regular no-load mutual funds, which levy no sales commission or surrender charge and impose average annual expenses of less than 0.5% (for index funds) or about 1.5% (actively managed funds), and determine whether you might be better off going that route on your own.

It's also important to understand that earnings you withdraw from an annuity will be taxed as ordinary income, no matter how long you have owned the account. The maximum income tax rate today is 35%, but if you've got a while before you retire, you can be certain tax rates won't increase.