Annuities are a retirement option, but be wary of fees

— -- You've stuffed money into your 401(k). You've funded your IRA. But retirement is near, and you're so nervous about the market you don't know what to do.

Your insurance company or your broker might have a suggestion: an annuity. And, because interest rates are so low and the stock market has been so stomach-churning, investors have been taking that advice.

For some people, an annuity might be a good choice. But you should pepper you agent with many questions before you commit: It's generally easier to get into an annuity than it is to get out of one, and you may have better options available.

Question 1: What type?

If you're saving for retirement, your agent is probably suggesting a deferred annuity, which is a contract between you and an insurance company. In a deferred annuity, your earnings aren't taxed until you withdraw them, much like an IRA.

Deferred annuities, in turn, come in two flavors: fixed and variable. Fixed annuities have a guaranteed lifetime minimum interest rate, as well as a rate that fluctuates at regular intervals, usually annually. For example, the insurance company might offer an annuity with a 2% minimum lifetime interest rate, and a current rate of 4%.

Brokers often suggest a fixed annuity as a substitute for a bank CD. You'll get a higher interest rate from a fixed annuity than you would from a bank CD. But nothing comes for free. You'll have two barriers to getting at your money:

•Tax penalties. As with an IRA, you'll have to pay a 10% tax penalty for any withdrawals you make before you reach age 59½. Should you withdraw part of your earnings, you'll owe ordinary income taxes on the entire withdrawal.

•Surrender charges. Insurance companies hit you with a surrender charge if you withdraw within the first years of your contract, known as the "surrender period." The charge decreases each year. Many will allow you to take 10% of your account per year without surrender charges.

Variable annuities allow you to manage your account by investing in a suite of subaccounts, which are like mutual funds. How much you have at the end of your contract depends on the markets and your skill in managing your money.

You also get a small insurance benefit: Your heirs are guaranteed to get as much as you have invested. This won't do you any good, but might make your beneficiaries a bit cheerier.

Question 2: Bells and whistles

Nearly all annuity contracts have features available to make the contract more attractive — and hence more salable. But riders will cost you.

For example, some variable annuities will offer guaranteed lifetime withdrawal benefit riders, which means you get a guaranteed withdrawal amount for life, even if your investment performance is wretched. For example, suppose you invest $200,000 in a variable annuity. When you retire, your account is worth $125,000. If you had purchased a 5% GLWB, you'd be able to withdraw 4% of $200,000 every year, or $8,000.

Others will offer a stepped up death benefit — the insurance portion that pays your heirs when you die. Rather than using the total of your contributions minus withdrawals, your death benefit might be calculated on the account value at a certain date — allowing you to lock in profits.

You have to take the cost of a rider into consideration. If you earn 6% a year in a variable annuity and get riders that cost 2 percentage points a year, you've shaved your return to 4%.