Fixed annuities are long-term savings vehicles used mostly for retirement or as a safe holding place for accumulated money. Interest rates are credited by the issuing life insurance company for a specified period. The rate you earn will not be less than the minimum guaranteed in your policy.
Fixed annuities offer two unique features:
Rates are often comparable to—and sometimes higher than—those of other conservative vehicles like certificates of deposit (CDs) and high-grade bonds. Income tax deferral on credited interest can provide a significant advantage over time.
The insurance company issuing your annuity guarantees that your money will not lose value. They also guarantee the annuity’s interest rate and income features. Guarantees are based on the claims-paying ability of the issuing insurance company. Annuities are not FDIC insured and may decline in value.
Fixed annuity premiums are paid with after-tax dollars unless used for an Individual Retirement Account (IRA) or other qualified retirement plan. Annuities offered as part of a qualified retirement plan offer no additional tax deferral benefits. Income taxes on earnings are deferred until you take distributions, which are then taxed as ordinary income until you take all interest earnings. Further distributions of your original premiums will be income tax free. If you use pre-tax dollars to fund your annuity, all distributions will be taxable. If you convert your annuity to income, part of each income payment will be deemed a tax-free return of your original premiums.
Most distributions before age 59½ incur a 10% penalty tax, but certain situations qualify as exceptions. Furthermore, if you access funds early, generally within the first 5-8 years of your contract, you may incur surrender charges.
You may choose guaranteed income payments for:
The amount of your income payments depends on the income option you choose, the premiums you paid, and prevailing interest rates. Lifetime income payments will be based on your age when payments start.
As you consider the role annuities will play in your overall financial plan, remember that they are long-term instruments. So, plan for your future today.
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.
This article was prepared by Liberty Publishing, Inc.
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