Understanding the Benefits of Annuities for Your Future
An Overview of Annuities & Benefits of Annuities – Annuities are used mainly to supplement more traditional sources of retirement income such as Social Security and pension plans. Common features include Tax-deferred growth. You will pay no income taxes on the earnings from your annuity investments until you begin making withdrawals or receiving periodic payments.
Advantages of Annuities vs. the Disadvantages
You pay no taxes on annuity earnings until they are withdrawn. This means all your money keeps compounding without being reduced by annual taxation. When you begin to receive payments from your annuity, only the gains are taxed, not your initial investment.
Your money can grow more quickly in an annuity due to three-way compounding. Your purchase payments, their earnings, and amounts that you would otherwise have paid out in taxes all remain in your account to grow and compound over time.
Death Benefit Provisions
Most annuities include some form of the death benefit. A death benefit is simply a guarantee by the issuer that upon your death, your beneficiaries will receive your premiums. When purchasing annuities be sure to find out what type of death benefit you have. Also, look into the company’s history of paying claims to make sure you can rely on the money to be distributed after you die.
*When do you want to receive your payout?
If you prefer, you can elect to have your annuity start paying out immediately (which means you will be taxed on the money you withdraw). This is what you should choose if you are looking for immediate income. If you choose to defer your payouts you will begin receiving payments at a later date, usually when you retire.
*What type of investment do you want?
You can choose a fixed investment where the annuity is usually invested in government securities and high-grade bonds. These are safer investments and offer a guaranteed rate of return over about 1-10 years.
You can also choose to invest in a variable account. The investment risk increases as these accounts are usually tied to market performance and are modeled after mutual funds. Variable annuities allow you to invest in a selection of sub-accounts such as securities portfolios, fixed interest accounts, and money markets.
*How do you want your annuity to payout?
Usually, you can withdraw your earned interest or 15% from the annuity per year without being charged a penalty fee. However, it is important to remember that anything you withdraw from your annuity will be taxed as income and if you are less than 59 ½ years old, the government will penalize you an additional 10%.
You can withdraw more than the annual allowance. But, in many cases a surrender fee with be charged although some companies that charge a surrender fee will counter that charge with a bonus of 3%-5% added to your principal. Bonus annuities will typically have longer surrender periods and be more expensive than a standard-issue annuity.
Annuities without surrender charges are available at a higher cost, for those investors who want 100% access to their money. These annuities do not offer bonuses.
Additional Benefits of Annuities
You do not have to qualify to purchase an annuity. As long as you are not yet receiving payments, there is also no IRS reporting necessary (no 1099 or tax bill). Annuities are also not subject to legal certification of validity and cannot be taken if you are sued by a creditor.
There are a variety of annuities available to fit your personal needs. Please see Types of Annuities for more information.