Common features of Fixed Indexed Annuities (FIA)
Great Growth Potential Without the Risk!
Variable annuities have been very popular in years past due to the potential of growth based on the performance of individual investments tied into the annuity. Unfortunately, when the market crashes, you can can also lose your money. On the other hand, Fixed annuities are very conservative, and similar to a bank CD, with a guaranteed interest rate, and are not tied to the market. However, as you would expect, the interest rates on fixed annuities are usually fairly low (although probably much better than CDs as of the time of this writing).
FIXED INDEXED ANNUITIES combine the best of both variable and fixed annuities, without the downsides! Depending on the FIA you sign up for, you could experience a great gain based on the market growth, and also have a smaller, guaranteed rate of interest, too. Plus, your gains are locked in, usually on an annual basis, and you will never lose a dime based on a market downturn!
Several Ways Your Money Grows
First, many fixed indexed annuities offer an upfront bonus as much as 6% or more, that gets credited on day one that the insurance company receives your premium. For example, if there is a 6% bonus, and you contribute or rollover $100,000 to start the annuity, you would actually receive a $6,000 bonus, and start earning additional interest on $106,000!
Then, additional fixed and indexed interest is usually credited and "locked-in" to your annuity usually each year on your policy anniversary date. YOU choose the crediting options and allocation percentages, and the insurance company will usually let you change these every year.
Plus, many fixed indexed annuities offer an optional income rider with a guaranteed interest rate, (possibly up to 7.2% a year) that you could add to your annuity for a small yearly fee. This "hedges your bet" and guarantees that the income value of your annuity will grow a certain minimum percentage each year, regardless of how the annuity actually performed.
In addition, some annuities offer other ways your money can grow, like enhanced death benefit riders to offer a potentially greater benefit to your loved ones in the event of your passing.
Ideal for Estate Planning
Proceeds from annuities pass directly to your beneficiaries without the delay, expense, and publicity of probate in most states. If you've ever had a loved one's estate go through this time-consuming legal process, you know just what kind of advantage this is.
The Power of Tax Deferral
Since you do not pay taxes on earnings (until you decide to start taking an income or money out), your annuity is able to work harder thanks to tax-deferral. You will have to pay taxes on earnings when you withdraw your annuity's gains, but at least you can decide when that happens.
No Contribution Limits
Contributions to other retirement savings vehicles, like 401(k)s and Individual Retirement Accounts, are strictly limited. Annuities, however, offer tremendous flexibility. Depending on the tax qualification of the annuity you set up, you could potentially contribute as much as you want, up to the limits imposed by the insurer, and take advantage of tax-deferral savings. Plus, you can add to your annuity contract at any time. Or... if you choose, you can also set up your annuity as an IRA, under the same contribution limits. Consult your tax advisor for the best options for you.
Flexible Payment Options
Unlike 401(k)s and IRAs, which require that you begin making withdrawals at age 70 1/2, you may be able to wait much longer with annuities. When you do decide to begin receiving payments, you can usually select one of the following methods:
- Lump Sum distribution (a one-time payment)
- Periodic distributions (you can take money only when you need it)
- Systematic distributions (a fixed or variable amount is sent to you at regular intervals)
- Annuitization (fixed or variable payments, guaranteed for the rest of your life)
The money inside your annuity is made up of two components -- principal and earnings. Assuming your annuity was opened with after-tax dollars, you're only taxed on your earnings.
Different distribution methods behave differently when it comes to taxes; for instance, Lump Sum, Periodic, and Systematic distributions exhaust all earnings (which are taxable) before tapping principal. Under annuitization, each payment consists of both principal and interest, spreading your tax liability evenly among payments. Through these distribution options, you have complete control over when you will pay taxes on your earnings.
Annuities are not perfect when it comes to tax control. If you should pass away while your annuity is accumulating, all deferred taxes on your growth will become due, reducing your annuity's value.
Easy To Start and Maintain
Usually, a simple application, a check, and your signature begins your annuity. And, at the end of each year, you will not receive a 1099 for income earned within your annuity contract. That's one less thing to worry about when April 15th rolls around.
Annuities also do not offset Social Security benefits like bond, CD, and other investment income does.
Annuities are easy to establish and often come with a "free look period." Your state of residence or the annuity contract will define a length of time (usually 10 days) where can cancel your contract if you decide it's not right for you.
You can even exchange older, non-performing annuities into a newer fixed annuity with no tax consequences, thanks to Section 1035 of the Internal Revenue Code.
We work with many of the top annuities on the market today!