Types of Annuities
• Fixed Annuity
• Fixed Index Annuity
• Variable Annuity
These types of annuities earn steady (or fixed) interest for a specific period of time. Fixed Annuities protect your money from the ups and downs of the market and you will know exactly how much interest and income you will receive by a set rate determined by the insurance company.
Fixed Index Annuity (FIA):
FIA’s provide the same protection from market volatility as a fixed annuity but it offers the potential for better long-term growth (more accumulation potential). Growth is determined by the positive changes in an external index like the S&P 500. However, you are not actually participating in the market.
If you are willing to assume more risk and want greater accumulation potential, a variable annuity might be a good choice for you. The growth is based primarily on your chosen investment allocations so it offers more growth potential but you could lose money as you are subject to market volatility. There are also investment fees that vary depending on your investment choices.
Phase 1: Accumulation Phase
This is when your retirement savings have the opportunity to build up tax deferred through credited interest or investment returns.
Phase 2: Income Phase
This is when you start receiving money from your annuity helping you live your retirement the way you want. Of course, you will have to pay income taxes on any taxable portion.
What is a current interest rate?
The current rate is the rate the company decides to credit to your contract at a particular time, which the company guarantees will not change for some period. The initial rate is an interest rate the insurance company may credit for a set period of time after you first buy your annuity. The initial rate in some contracts may be higher than it will be later. This is often called a bonus rate. The renewal rate is the rate credited by the company after the end of the set time period. The contract tells how the company will set the renewal rate, which may be tied to an external reference or index.
What is a minimum guaranteed rate?
The minimum guaranteed interest rate is the lowest rate your annuity will earn. This is determined and stated in the contract.
Annuity death benefit:
In some annuity contracts, a death benefit may be paid out to your beneficiary if you pass before you take income payments. The most common death benefit is the contract value or the premiums paid, whichever is more.
What is the tax treatment of annuities?
When it comes to the taxation of an annuity, it will depend on the type of annuity.
A qualified annuity is taxed the same as any other qualified account such as a 401k, an IRA, a profit sharing plan, or other tax-deferred retirement account. Taxes are deferred until withdrawn and if taken prior to age 59 1/2 will be subject to a 10% penalty.
A non-qualified annuity is taxed on the earnings, not the initial principle invested, and earnings are fully taxable at ordinary income tax rates. Once you have reached the initial amount invested, you will no longer be taxed unless the type of annuity offers continued earnings. If taken prior to age 59 1/2 you will also pay a 10% penalty on the earnings.
There are additional tax implications that are based on withdrawals, annuitization, and death. You should always consult your tax professional for complete information regarding annuity taxation.