What are Fixed Annuities?
Fixed annuities provide a guaranteed minimum interest rate and are considered savings instruments. Insurance companies issue all fixed annuities. They are not government or bank obligations, so naturally they are not FDIC insured. However, fixed annuities have an extraordinary record of safety and offer other benefits.
Prior to the late 1970s annuities were primarily used as a retirement income vehicle. The textbook definition of an annuity in those days was “A periodic income for a specified length of time, for life, or a combination of the two.” Today, however, annuities can mean much more.
Main Annuity Benefits:
How Does an Index Annuity Work?
Like most annuities, index annuities can provide you with a steady stream of income in retirement. Before you start receiving any income, though, you must first agree to and fund a contract. Your contract will spell out how you will fund your annuity—all at once with a lump sum or with steady payments over time—and when you can begin to make withdrawals.
The annuity company will invest your money using the index you select. The exact indexes available depend on the annuity company, but common indexes include the S&P 500, the Nasdaq 100, the Russell 2000 and the Euro Stoxx 50. You can put all your money in one index or split it across several.
Equity indexed annuities may be safer than investing directly in index funds because the annuity company protects you against losses.
Index annuities also benefit from tax-advantaged status, similar to 401(k)s or IRAs. This means your investment returns will grow tax-deferred until you withdraw them.
Learn how to generate guaranteed lifetime retirement income with Index Annuities
Money remaining inside an annuity grows without being taxed until withdrawn. Unlike qualified retirement accounts where you must begin taking out money around age 70, most annuity contracts permit the owner to enjoy the advantage of tax deferral until age 85, 90 or even later. Tax deferred does not mean tax-free; interest is taxed when withdrawn. Also, the Treasury Department charges a 10% penalty on interest, in addition to regular taxes, if withdrawals are made before age 59 1/2.
Watch to Learn about the CD Alternative... the Multi-Year Guaranteed Annuity (MYGA)
Fixed Vs. Variable annuities
The differences between variable annuities and fixed annuities are significant. In a variable annuity, because your income or account value is based on the value of the stocks or bonds backing the annuity assets, the income and/or account values fluctuate. When you read or hear about annuities in the media, most of the time the subject is VARIABLE annuities NOT FIXED annuities.
Unlike with fixed annuities, the annuity owner bears the investment risk with variable annuities. Therefore, variable annuities are considered investment securities and would be a “risk money place” for your money.
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Bruno R. Guillemette RHU
Asset Maximization Group LLC
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