Deferred Annuities
A fixed interest deferred annuity is a product that is designed to help you accumulate funds for your retirement. The money in your annuity earns a fixed rate of interest and your money accumulates on a tax-deferred basis, meaning you do not pay taxes on your earnings until you actually withdraw them from your policy.* You can choose to lock in your initial interest rate for either one year or three years. After the initial interest rate guarantee period, your policy receives a new interest rate each year on your policy anniversary. This rate is guaranteed never to be less than 3.0%. At your request, the money you've accumulated can be used to provide guaranteed income payments to you for the rest of your life.
* Withdrawals may be taxable and a 10% IRS penalty may apply to withdrawals taken before age 59 1/2.Types of Deferred Annuities
There are three kinds of deferred annuities and each differs in how the money in your contract is invested.
- Fixed annuity. The money you invest earns a fixed rate of interest that is guaranteed by the insurance company. Best of all, the growth in this annuity is tax-deferred. You pay no taxes on the growth- only when you take it out. Another upside is that there is no risk involved. The downside is that you will miss out on any gains you could have made if the stock market performs well. When you annuitize, your payments are also fixed.
- Variable annuity. Your money is placed in investment options known as subaccounts, which operate similar to mutual funds. Each subaccount has its own degree of risk, ranging from aggressive growth funds to bond funds. The upside is that you have the opportunity to make substantial gains, depending on the performance of your investment. Annuities are tax-deferred vehicles, so whatever return is achieved, it will not be reduced by current income taxes. Goodbye 1099's! The downside is that you will lose money if your investments perform poorly. Additionally, variable annuities contain expenses and charges not typically associated with other investments (mortality & expense fees, administrative fees, etc.) as well as surrender charges should you terminate your plan early. Variable annuities- as with all deferred annuities, give you the option of annuitizing. When you annuitize, your payments fluctuate depending on the performance of your investments. The insurance or investment company recalculates your payments each year based on the performance of your investments. Some VAs allow "fixed annuitization," in which you receive fixed payments.
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- Equity-indexed annuity. Your money performs tax deferred and invested in a fixed account. Additionally, you may earn additional interest based on the performance of a particular stock index, such as the Standard & Poor's 500 Index, the Dow Jones Industrial Average, the NASDAQ Composite Index, or the Russell 2000 Index. The upside is that you get the best of both worlds — the opportunity to earn money from stocks and the stability of a fixed account. The downside is that you still essentially have a fixed annuity, and the gains you can make in the contract due to the performance of the stock index are fairly small. When you annuitize, your payments are fixed.
Help Me Decide
Deferred annuities come in different forms (fixed, variable, indexed) and have different phases (accumulation, annuitization) and possess a wealth of options. An annuity expert can help you easily navigate through the different forms, phases, and options to help assure that you secure the right type of annuity, that is structured properly, and possesses all the appropriate options to help you reach your financial goals.
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