Rollover Strategies:
Fixed and Fixed Indexed Annuities- “Tax Advantaged” Considerations
Annuities are financial contracts issued by insurance companies designed to help individuals save for retirement and/or provide a guaranteed income stream in retirement. Within the broader category of annuities, Fixed Annuities and Fixed Indexed Annuities (FIAs) are two popular options that appeal to those seeking a balance of security and growth potential.
Fixed Annuities: The Foundation of Predictability
A Fixed Annuity is the most straightforward and conservative type of annuity. When you purchase a fixed annuity, the insurance company guarantees a specific interest rate for a set period, or sometimes for the entire duration of the contract. This makes them highly predictable and low-risk.
How They Work:
- You contribute a lump sum or a series of payments to the insurance company.
- The money grows at a guaranteed, predetermined interest rate. This rate is set by the insurance company and does not fluctuate with market conditions.
- Your principal is fully protected from any market downturns.
- Your earnings grow on a tax-deferred basis, meaning you don't pay taxes on the interest until you withdraw the money, typically in retirement.
- At a future date, you can choose to receive your accumulated funds as a lump sum or convert them into a guaranteed stream of income (annuitization) for a set period or for life.
Key Benefits of Fixed Annuities:
- Guaranteed Growth: You know exactly how much your money will grow each year.
- Principal Protection: Your initial investment is completely safe from market volatility.
- Tax Deferral: Earnings compound faster because taxes are postponed until withdrawal.
- Simplicity: Easy to understand and manage, making them suitable for conservative investors.
- Predictable Income: Can be annuitized to provide a reliable, steady income stream in retirement.
Who Fixed Indexed Annuities Are For:
FIAs are suitable for individuals who are moderately conservative. They appeal to those who want to protect their principal but are also interested in some exposure to market growth without directly investing in volatile securities. They are often considered by pre-retirees or retirees who seek a balance between security and the potential for higher returns than fixed annuities, particularly for a portion of their retirement portfolio.
Important Considerations for Both Types of Annuities:
- Long-Term Commitment: Annuities are designed for long-term savings. Early withdrawals may incur surrender charges, which are fees for taking money out before the end of a specified period.
- Taxation of Withdrawals: While growth is tax-deferred, withdrawals in retirement are typically taxed as ordinary income. If withdrawals are made before age 59½, they may also be subject to a 10% federal tax penalty.
- Fees and Charges: Be aware of any administrative fees, rider charges, or surrender charges that may apply.
- Insurance Company Strength: Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.
- Not FDIC Insured: Annuities are insurance products, not bank deposits, and are not FDIC insured. However, state guaranty associations provide a level of protection in the event an insurance company fails.
Choosing the right annuity depends on your individual financial goals, risk tolerance, and time horizon. It is always recommended to consult with a qualified financial professional to determine if a Fixed Annuity or Fixed Indexed Annuity aligns with your comprehensive retirement plan.
