Annuities Offer Great Opportunities
Annuities offer many benefits to the potential investor. This article will provide you with solid reasons to consider purchasing an annuity.
Annuities vs. CDs
If you want an investment that will guarantee income as long as you live, choose an annuity. Annuities are contracts between insurance companies and investors. Exact contract terms vary between companies. Generally, annuities promise interest accrual on investments by individuals with payments to those people in the future. Annuities have death benefits for heirs, income for life of the investor, and tax deferment until withdrawal. Your investment is backed by the financial stability of the insurance company that sold you the contract.
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Certificates of Deposit (CD) offer investors a reliable and secure investment. In return for investing your money in an account for a specified time, your bank promises to pay a small interest rate for the use of your money. Insured by the FDIC like bank accounts, CDs are a good choice if you are looking for absolute stability. Unlike annuities, CDs do not offer tax-deferred savings. Interest rates are usually very low making this investment the wrong choice for someone looking to grow their money.
Annuities: Qualified and Nonqualified
If you want an IRA, consider purchasing a qualified annuity. These annuities allow your investment to accumulate interest while deferring taxes until you begin withdrawing payments. While the tax benefits are attractive, it is vital to remember that withdrawal before age 59½ will result in a 10% tax penalty. Early withdrawal may also subject you to surrender charges, depending on your contract and the length of time you have owned the annuity.
With IRAs, you are limited to a maximum contribution of $3,000 per year by the IRS. Investors age 50 or older may add $500 more per year. Distribution of income can be delayed until age 70.
Nonqualified annuities have already been taxed; therefore, any earned interest is taxed once you begin withdrawing payments.
Structure of Annuities
Similar to CDs, fixed annuities offer a guaranteed interest rate for a specified time. You choose the amount of time the rate is guaranteed. Unlike CDs, fixed annuities allow you flexibility to vary your payment amounts. Your money will accumulate at the pace you choose.
You can structure an annuity in many different ways. One lump sum will buy a single premium deferred annuity. Most companies require a minimum investment of $5,000. Flexible premium deferred annuities offer flexibility in the premium.
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Created to give you retirement income, most annuities are set up as long-term contracts. Insurance companies charge surrender fees to help persuade investors to continue accumulating funds rather than cancelling their account. Over time, these fees decline to zero.
Upon retirement, you can annuitize. This means that you can begin receiving payments from your investment account. You can structure payments in a variety of ways — monthly, quarterly, semiannually, or annually, depending upon your needs. You can choose a provision that guarantees income for life or the life of another as well. Some annuities offer limited withdrawals each year without annuitizing.
Remember the Benefits
The most attractive benefit offered by annuities is tax-deferred savings. Your money accumulates free from taxes until you withdraw funds. Upon withdrawal, you only pay taxes on the amount you withdraw at your normal income tax rate.
While annuities do offer a death benefit, you must remember that annuities are designed to provide retirement income. It is comforting, however, to know that an annuity can be set up so that your heirs can receive a death benefit without the stress of waiting for probate.
If you intend to use an annuity to fund a tax qualified retirement plan (IRA, SEP, or Simple IRA), you should be aware that other investments offer tax deferral features as well. Before making your decision to purchase any investment, carefully consider all features and benefits offered.