Annuities:
Understand the Basics
You're Probably Asking yourself
How Safe Are Annuities?
To answer the question, “How safe are annuities?” we first should explore what an annuity is. Basically, an annuity is an investment where you place money into an account with an insurance company. The money then grows for a period of time. After that period, the annuity begins a series of fixed payments, in most cases lifetime payments.
Certain types of annuities are generally safe, while others carry the same risks that a stock market investment would. Variable annuities, for instance, invest directly into the stock market. This means, at any point, you could lose your principal if the market goes down. However, fixed annuities and fixed indexed annuities (or FIAs) are different. With these types of annuities, you’re guaranteed* principal by the issuing annuity insurance company. With an FIA, your money is safe from market loss, regardless of market fluctuations.
How Does an Annuity Work?
Both fixed annuities and FIAs offer protections of principal as well as potential rate of return. The difference, however, is that an FIA also offers indexed interest potential. This means that, when its related index goes up, you can capture some of that growth. But if your annuity index goes down, you still don’t lose money. A fixed annuity, by contrast, offers a set interest rate, regardless of market conditions. Because it’s fixed, the rate is typically lower than what FIA owners may receive during an index interest increase.
Stages of an Annuity
There are two stages to an annuity. The first is the accumulation stage, during which you allow your money to grow. The second is the distribution phase, during which you can begin taking money out of your annuity.
During this stage, you don’t take payments or income. Instead, you allow your money to grow for a certain number of years. This phase usually lasts between 5 and 10 years. Some annuities, though, offer terms lasting 15 to 20 years for the growth stage. No matter the term, this first stage allows your money to grow. After this time is up, the distribution stage begins.
*Backed by the claims-paying ability of the carrier.
How Safe Are Annuities When it Comes to Taxes?
Your annuity isn’t taxable during the growth phase. You only incur taxes when you take the money out. An annuity offers some growth potential because it isn’t taxable immediately. For those looking to hold off on taxes, this may be an option to consider.
Other possible roll-over options exist with an annuity. If you have early retirement with a severance, for instance, you might be able to roll your money over into an annuity. This could be an option if you meet certain conditions. For instance, you need to have a 401(K) profit-sharing plan as part of your severance. In addition, you must be younger than 59 1/2. Some possible benefits of a roll-over include the ability to put taxes off until income withdrawal. Be sure to consult a tax advisor for more details.
If you can hold off on taking the income right away, an annuity may be something to consider. Contact us today to learn more about different types of annuities. We can review the options and determine which one is best for you.
