Annuity Benefits
An “annuity” is, in simplest terms, defined as an agreement with a company to receive money on a set schedule. An annuity can provide you with regular monthly or annual payments, possibly for the rest of your life.
Annuity Benefits
There are some risks associated with an annuity, depending on what type you have. If you’ve heard that an annuity puts your money at risk, whatever source said so was probably referring to variable annuities. Fixed annuities and fixed indexed annuities (FIAs) meanwhile, come with a guarantee* of safety on your principal. An FIA is the type we recommend, given that safety is our top priority when helping clients. However, safety is just one of many fixed indexed annuity benefits.
Fixed Indexed Annuity Benefits
An FIA has the benefit of keeping your money safe. This is because it doesn’t invest money in the stock market. However, it does link to an external index, allowing your interest rate to potentially rise when the market is doing well. But, no money is lost when the market falls.
Annuities are a product, not a retirement plan account, and not an investment. Not only do they come with no risk,* but they come with certain tax benefits compared to other options. And, depending on the individual contract, there may be a way to compensate for inflation built into your FIA.
There is no contribution limit on an annuity, which may make it the perfect option for you if you’ve exhausted your retirement accounts and want a safe space to store more of your money.
Phases of an Annuity
An annuity contract has two main phases: Accumulation and distribution.
Your money is protected, however, you must give it time: You cannot withdraw money from it until the date specified in your contract.
The distribution phase begins when you start taking payments from your annuity. You can specify how you’d like to receive payments: Year, quarterly, annually, etc. The term can be a lifetime term. You have choices about how and when you get your money: You may even choose to wait, letting your money grow more before withdrawing the money. FIAs do not come with required minimum distributions.
Taxes and Annuity Benefits
During the first stage of your annuity, your money grows, tax-deferred. Taxes are only paid when you withdraw the money, and even then, only ordinary income tax. An annuity product may be helpful if you wish to reduce the burden of taxes on your retirement money.
One strategy requires a number of qualifiers to apply to you, but may be very useful to know about: Assuming you are under age 59 1/2, have received a large lump sum from a 401(k) from a former employer, as part of an early retirement or severance package. In this scenario, you’d have to pay hefty taxes… Unless you “roll the money over” into an annuity instead. Of course, when it comes to tax-related questions, you should always consult a qualified tax advisor about them.