If you want to protect your assets and savings throughout retirement, there are a number of immediate payout annuity advantages to consider. A savvy investor realizes that the monthly checks from an annuity can help him or her plus a spouse or heirs for the rest of the investor’s lifetime.
What are annuities?
Annuities are unique investment products sold by insurance companies that can help you save more for retirement, generate a guaranteed stream of income in retirement, or both. A Fixed Index Annuity (also referred to as an Equity Indexed Annuity) provides you with the best features of a traditional fixed annuity—namely, a guarantee of principal. Unlike most securities or mutual funds, where account balances can fluctuate with the market’s performance, premium deposited into a Fixed Index Annuity is guaranteed to never go down with market downturns. A contract owner of a Fixed Index Annuity participates in market-indexed interest without market-type loss.
Annuities have helped millions of people prepare for retirement; but, because there are different types with different purposes, they can be a bit confusing. Keep in mind, the annuities that Key Financial Group offers fall into three distinct categories:
Fixed-Indexed Annuities let you save more for retirement—even after you have maxed out contributions to 401(k)’s and IRA’s. The issuing company provides a minimum guaranteed rate of interest plus the potential for addition interest based on an index, such as the S & P 500 or NASDAQ. During the payout period, the amount of each income payment to you is generally set when the payments start and will not change.
Multi-Year Guaranteed Annuities (aka—“CD-type Annuities”) were developed to take some of the confusion out of the fixed annuity world for those investors who prefer the predictability of Certificates of Deposit. After the contract term is over the rate typically resets similarly to a Traditional fixed annuity where it resets annually never going below a minimum guarantee set at the contract date (typically 2-3%).
Single Premium Deferred Annuities or Immediate Annuities provide an immediate guaranteed stream of income in retirement in exchange for a lump sum deposit of money with the insurance company. The insurance company promises to make regular payments to the owner for a specific period, such as the remainder of the annuitant's life. The payments can be set up in any of a variety of different ways.
TAX TREATMENT OF ANNUITIES
Annuities used to fund certain employee pension benefit plans (those under Internal Revenue Code Sections 401(a), 401(k), 403(b), 457, or 414) defer taxes on plan contributions as well as on interest on investment income.
Income tax on annuities is deferred, which means you aren’t taxed on the interest your money earns while it stays in the annuity. Tax-deferred accumulation isn’t the same as tax-free accumulation. An advantage of tax deferral is that the tax bracket you’re in when you receive annuity income payments is usually lower than the one you were in during the accumulation or deposit period. You will also be earning interest on the amount you would have otherwise paid in taxes during the accumulation period. Most states’ tax laws on annuities follow the current federal law.
Part of payments you receive from an annuity are considered as a return of the premium you’ve paid--you won’t have to pay taxes on that part. Another part of the payments is considered interest you’ve earned—this is the part, considered interest, that you must pay taxes on when you withdraw the money. You may also have to pay a 10% tax penalty if you withdraw the accumulation before age 59 1/2. The Internal Revenue code also has rules about distributions after the death of a contract holder.
You can also use annuities to fund traditional and Roth IRAs under Internal Revenue Code Section 408. If you buy an annuity to fund an IRA, you’ll receive a disclosure statement describing the tax treatment.
