If you’re like some Americans, you’ve probably heard of annuities but are unsure what they are. An annuity is a contract with an insurance company designed to help your money last throughout your life. With an annuity, the money you contribute when you purchase it is converted into regular payments used to fund your retirement. Annuities can also be personalized based on the owner’s and beneficiaries’ specific needs. It’s important to know which type of annuity is suitable for you based on payout options, risk level, and income goals.
There are three types of annuities-
Fixed- A fixed annuity provides a fixed rate of return and is considered a low-risk annuity option with a predictable reward since the initial investment is protected.
Variable- The performance is tied to the overall market’s performance with a variable annuity. This option has a higher risk, especially during market volatility, where the loss of principal may occur.
Fixed-indexed- The performance of a fixed indexed annuity has two types of accounts: the fixed account that guarantees a specific interest rate and a sub-account tied to the performance of an index, such as the S&P. A fixed-indexed annuity has the feature of guarding against loss of principal. This annuity type offers a medium risk with the potential for more reward since the accumulation of the sub-account won’t sink below a set amount. At the same time, the fixed account continues to earn interest.
Payment schedule options-
Each annuity can provide immediate or deferred payments, depending on your designated payment schedule.
- Immediate: With an immediate annuity, you can begin receiving payment when you make your initial investment. This payment schedule may be a better option for those quickly approaching retirement who immediately need a regular monthly amount.
- Deferred: With a deferred annuity, the money you invest continues to grow until you are ready to begin taking withdrawals. A deferred payment schedule may be a good option if you are still years away from retirement and won’t need the money right away. Note: Deferred annuities can be converted into an immediate annuity once the owner wants to start receiving payment.
A benefit of purchasing an annuity is that an annuity provides a predictable income stream to help fund your retirement. Another feature of annuities is that they don’t have a contribution limit, unlike 401(k)s and IRAs. Annuity owners also enjoy tax-deferred growth, similar to a traditional 401(k), but taxes on distributions aren’t due until withdrawing in the form of payments.
Are you considering an annuity as part of your retirement assets? Reach out to your financial professional to review annuity options and determine if an annuity is appropriate for your unique situation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
Fixed Indexed Annuities (FIA) are not suitable for all investors. FIAs permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. FIAs typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply. Guarantees are based on the claims-paying ability of the issuing insurance company.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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