Annuities
An annuity is a contract issued by an insurance company. It is a unique financial product that provides tax deferral of interest and capital gains and the option (if funds are annuitized) of a guaranteed monthly income for life. Although annuities can serve various needs, the primary purpose of an annuity is that of a retirement vehicle for the annuitant, the person who will usually receive the annuity benefits. The annuity is an attractive retirement vehicle because the money accumulating in an annuity, grows on a tax deferred basis. There are two parts to an annuity: the accumulation phase and the distribution phase.
After accumulating money in an annuity it is not mandatory that the annuitant exercise the annuitization option and relinquish control of his or her cash value and enter into the annuity distribution phase, the annuitant can cash out of his or her annuity. There may be surrender charges in doing so. Annuitization provisions with some companies allow you to get your money paid out over time with no surrender charges.
You can legally STOP PAYING CURRENT INCOME TAX ON YOUR INTEREST! Your interest is compounded and reinvested with no current tax due and the interest is added automatically to the original principal. Use the power of tax deferral to your advantage.
When I help you with starting an annuity policy, there are NO upfront sales charges...ever!
Always read your policy!!! If you need help, then please call me.
The Accumulation Phase
Features
During the accumulation phase, the fund grows tax deferred, it does not grow tax free. If the annuity was not purchased as part of a qualified retirement program such as an IRA, 401(k), TSA, or 457 plan, income taxes are paid on the earnings when money is ultimately paid out. If the annuity is part of a qualified plan the entire fund is subject to income taxes as it is withdrawn.
Triple - Compound your money! You get:
- Interest on interest.
- Interest on principal
- Interest on Tax Savings
You also have MORE CONTROL with how your money is being taxed. For example, if you do not take out any money in a given year, then you DO NOT get a 1099 form for that year!
Therefore, if you have a CD earning 5%, (which only double-compounds), an Annuity paying 5% would still outperform the 5% CD!
Of course, you have surrender charges for early withdrawals. Some annuities offer partial withdrawals free of surrender charges to certain limits.
If you withdraw money from your annuity before age 59 ½ it is called a "premature distribution" and is subject to an additional 10% IRS penalty.
If a premature death should occur, the accumulated funds within the annuity are transferred to the named beneficiary, avoiding probate costs.
Annuities can vary by payment mode and are available as "single premium" (purchased with one-time payment) or "flexible premium" (purchased with recurring periodic payments). They also vary by timing of the annuity income and may be available as a "deferred annuity" (which means that annuity income payments are deferred until later) or as an "immediate annuity" (which means that annuity income starts immediately).
For fixed and equity indexed annuities there is safety of principal and earnings. These are the types of Annuities I assist with.
Fixed Annuities
In a fixed annuity, the insurance carrier:
Declares a current rate of interest for a specified time period. Once the time expires the company will set a new rate which may be higher or lower than the original rate.
Guarantees a minimum interest rate of return which is specified in the contract, and at no time may the current or renewal interest rate fall below it. Guarantees the principal.
* Equity Indexed Annuities - Participate in Upside Potential Index Growth with No Downside Risk to principal!
An Equity-Indexed Annuity (EIA) has interest rates that are linked to growth in the equity market as measured by an index such as the S&P 500. The EIA owner enjoys the upside potential of equities but is not exposed to downside risk. Subject to fixed minimum guarantees, the value of an EIA can only increase due to market growth - it will never decline due to market movement. There are many variations in product design. No two of the EIAs are exactly alike, and some are very different from each other. However, all the various types fall into three general categories: annual reset, point-to-point, and annual high-water mark with look-back. The following is a simple definition of each. Please call us if you would like to know more.
A Roth IRA Equity Indexed Annuity gives you the best of both worlds. All the benefits of an annuity with the ability to get your retirement dollars distributed to you on a TAX FREE basis. ROTH IRA guidelines are adhered to.
Annual Reset - Also known as the annual ratchet design, the annual reset design resets the starting index point annually. It also credits index increases (interest) annually and compounds annually.
Point-to-Point - The point-to-point design measures the change in the index from the start of the term to the end of the term.
Annual High-Water Mark with Look-Back - The annual high-water mark with look-back can be viewed as a variation on the point-to-point design, except that it measures the index from the start of the term to the highest anniversary value over the term.
* Some annuities allow the insurance company to change participation rates, cap rates or spead/asset/margin fees either annual or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the fees, this could adversely affect an investor's return. Therefore, a prospective investor must carefully review his or her contract in order to examine these issues.
Withdrawal
Withdrawals may be made at any time. However, the withdrawal may be subject surrender charges and if done before age 59 ½ there will be a 10% IRS penalty. Some contracts allow an annual 10% withdrawal free of surrender charges. Some annuities are set up for income payments at a later date.
The owner may pre-authorize a systematic periodic withdrawal plan. The owner of the contract instructs the company to withdraw a percentage or a level dollar amount from the contract on a monthly, quarterly, semiannual, or annual basis. You may be able to make partial withdrawals in random amounts.
The Distribution Phase
As part of the distribution phase, the owner has two options, he or she can withdraw money (either in a lump sum or elect a systematic withdrawal plan) or annuitize (purchase an annuity pay out plan).
Annuitization
When the owner annuitizes the funds he or she purchases an annuity pay out plan. In a Fixed and in an Equity Indexed Annuity the owner purchases a monthly income that can be paid to him or her until death. It is a guaranteed income that will not change. In a variable annuity, the owner has an option to do the same or transfer all or part of the contract to one or more of the sub-accounts that are available, and annuitize those funds. The funds that are annuitized in the separate accounts produce an income that will change from month to month based on the performance of the sub-account that the funds are placed in.
Annuity Pay Out Plans
An annuity gives you a wide variety of settlement options and income withdrawal plans. Many annuities offer settlement options for your beneficiaries.
An annuity is a rare financial vehicle that can guarantee you a lifetime income that you cannot outlive!
Life Only - Periodic monthly payments to an annuitant for the duration of his or her lifetime and then ceases. It is for a lifetime, the annuitant cannot outlive the payments. The payments are determined at the time of purchase and are based on age and sex.
Life with 10 years certain - Payments will be made for at least ten years, regardless if the annuitant lives for the entire ten years. If the annuitant dies during the ten-year period the remainder of the ten-year payments will be made to a beneficiary. If the annuitant lives longer than ten years he or she will continue to receive payments for his or her lifetime. The guaranteed monthly payments will be less than "life only."
Life with 20 years certain - Payments will be made for at least twenty years, regardless if the annuitant lives for the entire twenty years. If the annuitant dies during the twenty-year period the remainder of the twenty-year payments will be made to a beneficiary. If the annuitant lives longer than twenty years he or she will continue to receive payments for his or her lifetime. The guaranteed monthly payments will be less than "life only", and "Life with 10 years certain."
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Annuity vs CD's......Look at the Differences! |
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.................................Bank CD........Annuity
Loan privileges..................No.............YES
Flexible premium................No.............YES
Avoidance of probate
costs and delays...............No.............YES
Withdraw for dollar-cost
averaging opportunities.......No.............YES
Withdraw for required
minimum distributions,
penalty free......................No.............YES
Potential Social Security
tax advantage...................No.............YES
Nursing Home Benefit..........No.............YES
Bonus premium available?.....No.............YES
Guaranteed lifetime income...No.............YES
Potentially high yields?.........No.............YES
Tax-deferred Growth?..........No.............YES
Variety of income options.....No.............YES
Triple-Compound Interest.....No.............YES
Avoid a 1099 if no money
is withdrawn in a year?........No.............YES
Equity-Index performance
without market risk?............No.............YES
Is the interest free
of current income tax?.........No.............YES
Partial withdrawals available
in random amounts?.............No.............YES
Settlement options available
for the beneficiaries?............No.............YES
Checkbook Access without
incurring a penalty?..............No.............YES
If money market interest
rates go up, will your rate
of return increase?...............No.............YES
If your CD or IRA is about to roll over and play dead, give me a call and I'll help you maximize your dollars!
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The material presented on our web site may contain concepts that have legal, accounting and tax implications. It is not intended to provide legal, accounting or tax advice, you may wish to consult a competent attorney, tax advisor, or accountant.
Note: Any reference to the word guarantee is based on the claims paying ability of the underlying insurance company.
