Is An Annuity Right For Me?


By definition, an annuity is a contractual financial product sold by financial institutions (broker dealers and insurance companies) designed to accept and grow funds contributed by the owner. When the owner starts to take a stream of income payments, usually in retirement, it can be a single payment (lump sum) or s series of payments (periodic).

Tax Qualifications Of An Annuity

Non-Qualified Annuity is contributed to with after-tax dollars which means that taxes have already been paid on the initial sum of money (principal also known as the cost basis). The principal is not taxed when money is withdrawn because taxes have already been paid, but earnings are. A non-qualified annuity grows tax deferred during the accumulation period. IRS rules for withdrawals don’t apply to non-qualified annuities because it’s after-tax money. Interest earnings, however, have not been taxed and are taxed when withdrawals begin.
Qualified Annuity is contributed to with pre-tax dollars which means that taxes are not paid on the principal investment dollars until funds are withdrawn.Taxes are paid on the entire amount (basis + earnings) when the owner starts taking distributions (usually in retirement). The annuity grows tax deferred during the accumulation period. With qualified annuities, funds grow tax-deferred. IRS rules say that you can access your funds as early as age 59 ½ with no IRS penalties but are required to start taking distributions no later than your attained age of 70 ½ or 71, depending on your birthday month. Failure to do so can result in extra IRS penalties.

Types Of Annuities

Variable Annuity is a retirement product that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose. The client assumes the investment risks in this type annuity and nothing is guaranteed for the payout. These are insurance based products and are sold by Broker-Dealers because they are invested in the Stock Market.
Fixed Annuity is a retirement vehicle which provides a guaranteed payout with no selection of investments. The insurance company assumes the risk in this type annuity which has a guaranteed payout to the owner. Interest earnings can be lower for a fixed annuity because they are primarily invested in bonds but the guaranteed income in retirement and safety of principal is the trade-off here. The client knows how much interest they will be earning each year.
Fixed Index Annuity is the newer member of this group of annuities and works differently than other annuities. The principal has minimum guarantees and interest credited to these accounts is based on changes in an external market index (i.e, S&P 500, Nasdaq, DJIA) but is not directly participating in the stock market and the principal is not at risk. This annuity offers a selection of strategies to choose from (portfolio diversification) with possibility for upside potential for earnings (when the stock market is up) without downside losses when the market is down. There are various riders and waivers that are offered with these annuities. Some are built- in with no fees, and others are not and have fees. (i.e, Return of Premium Rider, Terminal Illness Waiver, Hospital Confinement Waiver, Long Term Care Rider).
Hybrid Fixed Index Annuity is basically a fixed index annuity but the difference is that it offers an income rider that has guaranteed income for life that you cannot outlive. Just like the fixed index annuity, interest is credited to these accounts based on changes in an external market index (i.e, S&P 500, DJIA, Nas.daq) They are not participating in the market so the principal is not at risk. Riders like those in the fixed index annuity are sometime offered in these hybrid annuities too.
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