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Annuities

How Fixed Annuities Can Help Your Money Last

The Basics

Depending on the fixed annuity you purchase, you may pay a single premium or have the option of paying periodic premiums to your annuity over time. When you make your initial purchase, the company from where you purchased your annuity declares a fixed rate of interest, which your annuity will earn for a specific period of time. At the end of that period, the company will declare a new interest rate. Generally these rates are competitive relative to current market conditions. Your annuity provider may also offer a guaranteed minimum interest rate, so your account will always earn some interest, no matter what is happening in the larger economy.

Some fixed annuity policies offer bonus interest during the first year of the annuity. Others reward investors who purchase a policy with a larger contribution with a better interest rate.

The interest your annuity earns is tax-deferred.  This means that you don’t owe income tax on your investment earnings until you withdraw money—usually when you are retired. If your fixed annuity is part of a qualified investment plan (such as an IRA or 401(k) plan), you may also get a tax break on your contributions. Qualified plan investors can contribute pre-tax dollars to their annuity. However, there are limitations on the amount you can contribute annually. And you will eventually owe taxes on the money you contribute at the time you withdraw it.

Retirement Income

At some point—probably after you’ve retired—you’re going to want access to your money.

Annuity owners may choose to receive regular income checks (a process called annuitization). Your annuity will usually offer you one of several payout choices such as:

The amount of each check you receive depends on the payout option you’ve chosen, the amount of money you contributed to your annuity account, and the amount of interest your account is earning during the annuitization phase – when your money is earning interest.

Once you begin to withdraw money from your annuity, you will owe income tax on your annuity’s earnings*. But if you are no longer employed full-time, you are likely to qualify for a lower income tax bracket than during your peak earning years.

Or, rather than receiving regular income payments, you can simply make occasional or periodic withdrawals from your annuity.  Keep in mind that this choice comes with a tax disadvantage.  The IRS views all the money that comes out first as earnings, rather than as a combination of earnings and contributions.  As such, that money will be taxed at ordinary income tax rates.

Early Withdrawals

You may still have a few questions about fixed annuities. We can provide you with answers and help you choose a fixed annuity or other product that will help your meet your needs.