What is an Annuity?

Individuals hold about $2.2 trillion in annuity contracts, which is a sizable amount when compared to the estimated $9.2 trillion in total IRA assets.¹

What is an Annuity?

Annuity contracts are purchased from an insurance company. In return, the insurance provider pays regular premiums to the buyer, either right away or at a later time. These payments can be made on a regular basis (monthly, quarterly, annually, or all at once). Owners of annuity contracts can choose to receive payments for a predetermined number of years or for the rest of their life.

Annuities provide for tax-deferred growth of the invested funds. The cash invested in the annuity will not be taxed when the money is withdrawn, but the earnings will be taxed as normal income. An annuity has no maximum contribution amount.

Two Types of Annuities

There are two primary categories of annuities: fixed annuities and variable annuities. Fixed annuities provide a guaranteed payout, which is typically a fixed monetary amount or fixed percentage of the annuity’s assets. Variable annuities offer the possibility to allocate premiums between various subaccounts. This enables annuity owners to benefit from the potential greater returns that these subaccounts may provide. It also means the value of the annuity account could change.

Indexed Annuities

Indexed annuities are specialized variable annuities. The rate of return during the accumulation phase is determined by an index. Contract restrictions, fees, and charges apply to annuities, including account and administrative costs, costs associated with the administration of underlying investments, mortality and expense costs, and costs associated with optional benefits. Surrender fees are often higher if you withdraw money from an annuity within the first few years of the contract. Income payments and withdrawals are subject to ordinary income tax. A 10% federal income tax penalty may be imposed on withdrawals made before the age of 59½ (unless an exception applies). An annuity contract’s guarantees are reliant on the issuing company’s capacity to cover claims. The FDIC or any other government organization does not provide annuity guarantees.

Annuity Prospectus

The prospectus, which includes comprehensive information regarding investment objectives and risks as well as fees and expenditures, is used to sell variable annuities. Before making an investment or sending money to purchase a variable annuity contract, we strongly advise you to thoroughly read the prospectus. The insurance provider or your financial advisor should be able to provide you with the prospectus. Depending on market conditions, the value of variable annuity subaccounts may change and, when the annuity expires, may be worth more or less than the initial investment.

An Annuity Case Study

Robert’s Fixed Annuity: A Case Study. 52-year-old Robert is a business entrepreneur. He invests $100,000 in a deferred fixed annuity contract that offers a 4% return on investment. The contract will accrue, tax-deferred, during the following fifteen years. The contract ought to be worth a little over $180,000 by the time Robert is prepared to retire. At that point, the contract will begin making annual payments of $13,250. Of each payment, only $7,358 will be taxable; the remainder is considered a return of principle. For the rest of Robert’s life, these payments will be made. He will eventually get approximately $265,000 in payments, if he lives to be 85 years old.

Exploring Annuity Options

Understanding the different types of annuities can be a valuable step towards securing a financially stable future. Whether you’re seeking a guaranteed income stream, tax advantages, or a combination of both, annuities offer a range of options to suit your unique needs and goals. If you’re ready to explore the possibilities of annuities and learn more about how they can fit into your overall financial plan, we invite you to reach out to us. Our team of knowledgeable professionals is here to guide you through the process, answer any questions you may have, and help you make informed decisions.