Based solely on information from radio ads and free dinner sales presentations, one could assume that annuities are very simple safe and predictable investments. Of course, that is the goal of the ads. In reality, annuities are very complex investment vehicles that few investors understand before purchasing – sometimes effectively permanently committing their capital into an illiquid vehicle that increases your total tax bill, when they believe they are doing exactly the opposite.

Before purchasing any type of an annuity, read every document you are asked to sign. Do not rely on summaries or sales brochures. You can avoid most unforced investment mistakes by always reading before signing.

The most common criticism of annuities is their exorbitant expenses. Not only are annuity fees often unconscionable, they often have multiple layers of embedded fees, making it difficult for most people to determine the actual cost of their investment. It is not uncommon for the annual fees associated with the variable annuity to exceed three percent annually. On a $100,000 investment, the difference between annual expenses of three and one percent over 20 years could be more than $150,000. Surrender charges further penalize investors who need their money early in the life of an annuity.

While investment earnings within a variable annuity accumulate without taxation, when withdrawn, those earnings are taxed as ordinary income – even though most of the gains within the annuity are likely to have been earned as capital gains. You will postpone paying taxes on your annuity earnings, but once you begin to withdraw those earnings, you could be paying a 40.8% tax rate, instead of 18.8% to 23.8%. (Annuity earnings are subject to the 3.8% Net Investment Income Tax.) Under current law, if a couple’s taxable income is between $161,000 and $479,000, the tax on annuity earnings, albeit deferred, would be twice their capital gains rate.

When an annuity owner dies, his beneficiaries often inherit a double tax penalty. Like annuitants who receive annuity income during their lifetime, a beneficiary must pay ordinary income tax on the investment gain within annuity he inherits. To add financial insult to injury, annuities do not receive one of the most valuable tax benefits at a person’s death: a step-up in cost basis. If your mom paid $50,000 for a share of Berkshire Hathaway stock 20 years ago that is worth $300,000 when she dies and leaves it to you, your cost basis for tax purposes becomes $300,000; you never pay tax on her $250,000 gain. Inherited annuities, however, generally receive no step-up in basis, so your mom’s $250,000 unrealized gain in her annuity would not only become your $250,000 unrealized gain, it will be taxed as ordinary income, not a capital gain, whenever you withdraw it.

David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.