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| Top 5 Reasons for Buying An Annuity |
1. Principal Protection
2. Guaranteed Rates
3. Protection of Gains
4. Eliminates Market Risk
5. Income For Life
2. Guaranteed Rates
3. Protection of Gains
4. Eliminates Market Risk
5. Income For Life
Funding Your Future with a Fixed Annuity
A fixed annuity is a contract between you and an annuity issuer, usually an insurance company. In its simplest form, you pay
money to the annuity issuer; the issuer invests the funds and pays the principal and its earnings back to you or to your named
beneficiary. What's fixed about a fixed annuity? The issuer guarantees (subject to its claims-paying ability) a minimum rate of
interest on your investment and a fixed benefit amount if you elect to annuitize.
When is an annuity appropriate?
Annuity contributions are made with after-tax dollars and are not tax deductible. That's why it's often advisable to fund other
retirement plans first. However, if you've already contributed the maximum allowable amount to other plans and want to save
more toward your retirement, an annuity can be an excellent choice. There's no limit to how much you can invest in an annuity,
and the funds grow tax deferred until you begin taking distributions.
Once you begin withdrawing from your annuity, you'll pay taxes (at your regular
income tax rate) only on the earnings, since your contributions to principal were
made with after-tax dollars. Like a qualified retirement plan, a 10% tax penalty
may be imposed if you withdraw from an annuity before age 59½.
Annuities are designed to be very-long-term investment vehicles. In most cases,
if you take a withdrawal, including a lump-sum distribution of your annuity funds
within the first few years after purchasing your annuity, you may be subject to
surrender charges imposed by the issuer. However, many companies allow
options for withdrawals or distributions without incurring a charge. As long as
you're sure you won't need the money until at least age 59½ and you
understand the costs (including fees) involved, an annuity is worth considering.
Two distinct phases to an annuity
There are two distinct phases to an annuity contract: the accumulation phase and the distribution phase.
In the accumulation phase, you're putting money into the annuity. You can choose to pay your premiums in one lump sum, or
you can make a series of payments over time. These payments can be of equal amounts made at equal intervals, or of
variable amounts at irregular intervals, depending on the terms of the contract.
Annuities may be either immediate or deferred; the terms simply refer to when the distribution phase begins. Immediate
annuities are typically purchased with a single payment and the distribution phase usually begins within a year of the
purchase. While deferred annuities may be purchased with a single lump sum premium payment, they are most often
purchased with a series of periodic payments. The distribution period is deferred until some time in the future.
In the distribution phase, you begin taking money out of the annuity. You may withdraw some or all of the money in lump sums,
or you may annuitize. Subject to the claims-paying ability of the issuer, annuitization provides a guaranteed income stream for
either a specified period or for life.
How a Fixed Deferred Annuity Works
- In the accumulation phase, you (the annuity owner)
to the annuity issuer. These payments are made with
after-tax funds, and you may invest an unlimited amount.
2.The annuity issuer places your funds in its general
account.* Your annuity contract specifies how your
principal will be returned as well as what rate(s) of
interest you'll earn during the accumulation phase.
Your contract will also state what minimum interest rate
applies.**
3.The compounding interest on your annuity
accumulates tax deferred. You won't be taxed on these
earnings until funds are withdrawn or distributed.
4.The issuer may collect fees to manage your annuity
account. You may also have to pay the issuer a surrender
fee if you withdraw money in the early years of your
annuity.
5.Your annuity contract may contain a guaranteed**
death benefit or other provisions for a payout upon the
death of the annuitant. (The annuitant provides the
measuring life used to determine the amount of the
payments if the annuity is annuitized. As the annuity
owner, you're most often also the annuitant, although
you don't have to be.)
6.If you make a withdrawal from your deferred annuity
before you reach age 59½, you'll not only have to pay tax
(at your ordinary income tax rate) on the earnings portion
of the withdrawal, but you may also have to pay a 10
percent premature distribution tax, unless an exception
applies.
7.After age 59½, you may make withdrawals from your annuity without incurring any premature distribution tax. Since annuities
have no minimum distribution requirements, you don't have to make any withdrawals. You can let the account grow tax
deferred for an indefinite period. However, your annuity contract may specifiy an age at which you must begin taking income
payments.
8.To obtain a guaranteed** fixed income stream for life or for a certain number of years, you could annuitize which means
exchanging the annuity's cash value for a series of periodic income payments. The amount of these payments will depend on
a number of factors including the cash value of your account at the time of annuitization, the age(s) and gender(s) of the
annuitant(s), and the payout option chosen. Usually, you can't change the payments once you've begun receiving them.
9.You'll have to pay taxes (at your ordinary income tax rate) on the earnings portion of any withdrawals or annuitization
payments you receive.
* These funds are invested as part of the general assets of the issuer and are therefore subject to the claims of its creditors.
** All guarantees are subject to the claims-paying ability of the issuing company.
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Retirement Planning with Annuities
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