A fixed annuity may sound confusing at first but if you understand how a CD works at a bank, you have the basic knowledge for fixed annuities. Annuities have other features besides a rate guarantee that make it an interesting choice over a CD. There's a little more information to look at to see if this type of investment vehicle is right for you.
Fixed annuities are also called immediate or deferred annuities. The difference lies in how you use the product. A person that wants a deferred annuity uses it more like a CD. They don't take payments from it. The immediate annuity converts to payments over a specific number of years, for a specific amount or payments that you'll never outlive. Some people like a guarantee that their heirs get any unused principal. That's available too.
The tax-deferred interest is a real plus for those saving for retirement, but as with any benefit has negatives also. If you put the money into a deferred fixed annuity and suddenly realize that you need funds, you have a ten percent penalty to pay on the growth you remove if you're not yet 59 . The tax laws do allow you to take substantial periodic payments penalty-free. The payments must last until you're 59 or at least for 5 years.
Penalties for early removal of money don't stop with the IRS, insurance companies impose them too. Just like a CD, a fixed annuity has an early withdrawal penalty. It often ranges between four and seven percent. This normally gets smaller the longer you wait to take money and eventually disappears on most contracts. Some contracts, particularly those that pay a high rate, always have a surrender fee unless you annuitize. Occasionally they impose the same fee on beneficiaries. If you plan to take payments, it's not a problem.
There are exceptions to the surrender charge. Many contracts offer the ability to remove funds of as much as ten percent without penalty. This amount may be available each year or once for the life of the contract. Almost every annuity allows you to take the interest penalty free each year and some people use the annuities that way, just as they'd use a CD.
Annuity taxation occurs in two ways. If you remove the money from a fixed annuity in a lump sum as a withdrawal, the government taxes it with LIFO rules. This means, last in, first out. Since the last in is always interest, you pay taxes on the interest you withdraw. Unlike a CD, where even if you reinvest the money, you still pay taxes, you only have taxation of annuity interest once you remove it.
Immediate annuities use a different, favorable set of rules. The good news is that if you decide to annuitize a deferred annuity, you get the favorable tax treatment. The tax law indicates that part of the payment on systematic payment for fixed annuities is principal and part of it is interest. This allows you to spread the taxable growth out over several tax years.
The calculation comes from your life expectancy and the amount you'll receive in payments over that lifetime. If you make an initial deposit of $100,000, with a life expectancy of 25 years and annual payment of $10,000, you'll make $250,000 (25 times $10,000) with $150,000 over your initial investment. Simply divide the initial investment of $100,000 by $250,000 and you'll get the exclusion rate of forty percent. That means you only pay taxes on $6,000 each year. If you've had the money in the fixed annuity and have big gains, it pays to spread it out over several years.
People often select fixed annuities because they either love the idea that they'll never outlive their money, find it a useful tax-planning tool or simply like the high rate and ease of use. Many financial planners suggest that individuals divide their funds into several different vehicles for higher returns and a safer investment strategy. Often seniors fin that a fixed annuity is a great way of establishing a base income in addition to social security or their pension. They know they'll never run out of money, have a higher payment than an interest payment and can allow other funds to grow at higher rates of return. - 29971
Fixed annuities are also called immediate or deferred annuities. The difference lies in how you use the product. A person that wants a deferred annuity uses it more like a CD. They don't take payments from it. The immediate annuity converts to payments over a specific number of years, for a specific amount or payments that you'll never outlive. Some people like a guarantee that their heirs get any unused principal. That's available too.
The tax-deferred interest is a real plus for those saving for retirement, but as with any benefit has negatives also. If you put the money into a deferred fixed annuity and suddenly realize that you need funds, you have a ten percent penalty to pay on the growth you remove if you're not yet 59 . The tax laws do allow you to take substantial periodic payments penalty-free. The payments must last until you're 59 or at least for 5 years.
Penalties for early removal of money don't stop with the IRS, insurance companies impose them too. Just like a CD, a fixed annuity has an early withdrawal penalty. It often ranges between four and seven percent. This normally gets smaller the longer you wait to take money and eventually disappears on most contracts. Some contracts, particularly those that pay a high rate, always have a surrender fee unless you annuitize. Occasionally they impose the same fee on beneficiaries. If you plan to take payments, it's not a problem.
There are exceptions to the surrender charge. Many contracts offer the ability to remove funds of as much as ten percent without penalty. This amount may be available each year or once for the life of the contract. Almost every annuity allows you to take the interest penalty free each year and some people use the annuities that way, just as they'd use a CD.
Annuity taxation occurs in two ways. If you remove the money from a fixed annuity in a lump sum as a withdrawal, the government taxes it with LIFO rules. This means, last in, first out. Since the last in is always interest, you pay taxes on the interest you withdraw. Unlike a CD, where even if you reinvest the money, you still pay taxes, you only have taxation of annuity interest once you remove it.
Immediate annuities use a different, favorable set of rules. The good news is that if you decide to annuitize a deferred annuity, you get the favorable tax treatment. The tax law indicates that part of the payment on systematic payment for fixed annuities is principal and part of it is interest. This allows you to spread the taxable growth out over several tax years.
The calculation comes from your life expectancy and the amount you'll receive in payments over that lifetime. If you make an initial deposit of $100,000, with a life expectancy of 25 years and annual payment of $10,000, you'll make $250,000 (25 times $10,000) with $150,000 over your initial investment. Simply divide the initial investment of $100,000 by $250,000 and you'll get the exclusion rate of forty percent. That means you only pay taxes on $6,000 each year. If you've had the money in the fixed annuity and have big gains, it pays to spread it out over several years.
People often select fixed annuities because they either love the idea that they'll never outlive their money, find it a useful tax-planning tool or simply like the high rate and ease of use. Many financial planners suggest that individuals divide their funds into several different vehicles for higher returns and a safer investment strategy. Often seniors fin that a fixed annuity is a great way of establishing a base income in addition to social security or their pension. They know they'll never run out of money, have a higher payment than an interest payment and can allow other funds to grow at higher rates of return. - 29971
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John C. Ryan disperses his knowledge on how to find the best annuity given your particular situation. Want to learn more?? Visit us, for more advice on fixed annuities .
