So Should I Purchase An Annuity
In many cases, the answer to the question, Should I purchase an annuity? is an emotional not necessarily a financial response.
You might be giving up upside with your money invested in an annuity. However, you might feel better and more at ease.
Here are a few steps to take if you are considering an annuity. Use the NewRetirement Planner to:
The NewRetirement Planner makes it easy to:
- Try scenarios
Ways To Buy An Annuity
Some investment firms may also have a licensed broker on staff who can sell annuities.
Compare annuity rates
Once you buy an annuity, your regular payments are locked in. You cant change them for any reason. Its worth shopping around to compare annuity rates.
How Are 401s And Annuities Similar
401s and annuities share key characteristics that make them attractive retirement savings options.
- Long-term savings. Both 401s and deferred annuities allow you to make contributions over time. This can be helpful for those who want to save for retirement but dont have large sums to invest already.
- Tax-deferred growth. The gains you enjoy in both traditional 401s and annuities are tax-deferred, and youll only pay taxes when you begin taking distributions. And remember: The gains you experience in a Roth 401 will never be taxed as long as you wait until youre at least 59 ½.
- Early withdrawal penalties. Withdrawals taken before you turn 59 ½ generally incur an IRS penalty . Both annuities and 401s offer exceptions when you can make a penalty-free early withdrawal, like if you take substantially equal periodic payment .
- Assets pass outside of probate. When you designate a beneficiary on a 401 or annuity, those assets dont need to go through probate and can be passed directly to a named beneficiary.
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What Are The Common Types Of Annuities
Annuities are generally structured as either fixed or variable instruments. Fixed annuities provide regular periodic payments to the annuitant and are often used in retirement planning. Variable annuities allow the owner to receive larger future payments if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for less stable cash flow than a fixed annuity but allows the annuitant to reap the benefits of strong returns from their fund’s investments.
They Can Be Confusing And Complicated
Many financial planners view some annuities particularly fixed annuities as being the ideal solution to a retirees need for guaranteed income. Fixed annuities have a very good reputation. However, other annuity products are viewed as snake oil an unnecessary and expensive product.
It is very important that you understand the various features and terms that are applied to annuities.
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How To Decide If A Retirement Annuity Is Right For You
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A retirement annuity can provide a guaranteed stream of monthly payments that lasts the rest of your life. Many retirement experts suggest buying a retirement annuity from an insurance company if other sources of guaranteed income including Social Security and any pension payments wont cover your basic living expenses in retirement.
The potential advantages:
The potential disadvantages:
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Tax Implications On Annuities
You’ll have to report the money you get from an annuity as income when you file your taxes. You may have to pay tax on this money. The amount of tax you may pay will vary depending on the product. Taxes will be different if you buy your annuity using registered savings versus non-registered savings.
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Whether You Want To Leave Money To A Beneficiary Or Your Estate
You may decide that you want to leave money to your estate or a beneficiary when you die. If so, you could consider buying a term-certain annuity or a life annuity with either a joint and survivor option or a guaranteed payment period.
The annuity is not the only option. For example, you can also keep some money in another product, like a savings account, TFSA or RRIF.
Vs Annuity: Basic Concepts
First, lets review some basics. If youre a typical American worker, chances are you already have a 401, the near-ubiquitous workplace plan that provides valuable tax advantages on tens of thousands of dollars of retirement savings each year.
401s come in two flavors: traditional and Roth. Both shelter your retirement investments from taxes while youre still working, and both provide a tax break. The difference comes down to when you get that tax break: now or later.
With a traditional 401, you deduct contributions from your tax bill now. Money you invest grows tax-deferred over time until you begin withdrawals, usually after you reach at least 59 ½. Then you pay income taxes on withdrawals, based on your current tax bracket.
Roth 401s offer no upfront tax break but reward investors with tax-free withdrawals in retirement. Thats right. Tax-free. Youll never pay taxes on any money you take out from a Roth 401 as long as youre at least 59 ½ or meet certain conditions before then.
Meanwhile, an annuity is a type of insurance contract that generates steady income in retirement. You fund an annuity with either a lump-sum payment or payments over time, and then the company makes regular payments for a set period of time. In fact, you can own annuity contracts in your 401 account, like you would a mutual fund.
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Your Contributions Can Grow Tax
The money that you contribute to an annuity is tax-deferred. That means you can contribute money before you pay taxes. In fact, you wont owe taxes on the money until you start receiving payments. During the time between when you contribute funds and when you withdraw them, its possible that your money could grow significantly. This type of growth is similar to how 401 contributions grow.
Is An Annuity Right For Me
Annuities can provide guaranteed income for your life. And they offer security through a set monthly income which can increase annually if you are eligible for a Cost-of-Living Adjustment . However, flexibility is not a feature of annuities. Once you set it up, an annuity doesnt allow you to change the income amount. Once you begin receiving monthly payments, you cannot cancel the annuity.
With annuities, you take money out of market risk and use it to give yourself a monthly lifetime income. Annuities are the only investment withdrawal option that guarantee you will not outlive your account balance.
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A Secure Income Stream
For most retirees, the overriding concern is for a secure income stream for the future.
The best age at which to get an annuity depends on a number of factors, including a persons current circumstances and investments, risk tolerance, longevity prospects, and expected income needs in retirement. Given these factors, the best age to get an annuity is when you are able to optimize its benefits for your individual needs.
As people live longer and rely more heavily on their own capital, the notion of converting a portion of that capital into a guaranteed income stream has its appeal.
Income annuities, also known as immediate annuities or immediate payment annuities, were designed for that purpose. When you buy an income annuity, you enter into a contract with a life insurance company in which the insurer agrees to make fixed monthly income payments in exchange for a lump sum of money. This type of annuity starts paying income as soon as the policy has been initiated, in contrast with a deferred annuity, which doesn’t start to pay out until years later.
Income annuity payments are guaranteed for your lifetime or for a specified number of years. The payout is a bit less for a lifetime annuity because it adds a degree of uncertainty.
Provide For Your Heirs
Most annuities have features that allow you to pass the value of your contract directly to your beneficiaries, usually without the proceeds going through probate. You may also be able to designate that a beneficiary receives guaranteed income payments for a certain period or a lump sum.
Generally, your designated beneficiaries will receive the greater of two values:
- the account value when you die or
- the amount you contributed to the annuity .
Another feature of some annuities is a guaranteed death benefit, which ensures that your beneficiaries receive the full account value should you die before you begin receiving annuity income payments.
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Are Annuities Only For Retirees
Annuities can be part of your financial picture in your working years as well as during retirement.
Because deferred annuities offer tax-deferral1, you have more time to grow your money without paying income taxes on earnings. In that scenario, if you choose a variable annuity, you may have the option to invest in the stock market for growth and to protect your principal for beneficiaries.
Two additional reasons you might purchase an annuity before retirement: 1) to roll over a workplace retirement account when you change jobs and 2) to continue saving after you reach 401 or IRA annual contribution limits.
You Would Rather Pay Tax On The Seed Instead Of The Crop
Financial experts use an analogy to explain how taxes work regarding retirement plans. Lets say that you have a bucket of tomato seeds. It would make sense to pay taxes on the seeds before theyre planted because the crop yield will be worth more than seeds. So, if you want to pay taxes on fully grown tomatoes, it will be significantly higher.
How does that relate to retirement taxes? With a 401 or IRA, you may get a tax break from the tomato seeds you planted. However, you must pay taxes on the entire crop.
Thats not the case with annuities. So, while you wont get any tax savings on your annuity contributions , taxes are on the crop will be lower. Why? Because youre only taxed on the gains between principal and income. And, you will pay for these once you take money out of the account.
Also, youll be placed in a lower tax bracket because your income is lower earlier in your professional life.
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Are You Ready To Create A Fun And Secure Retirement
If youre ready to create a fun and secure retirement using income from an annuity, we should talk. At Annuity Gator, our mission is to educate consumers and financial advisors alike about how these financial vehicles work, and how they may be able to help your retirement be a fun time in your life.
Our retirement income experts can help you to narrow down the annuity that could work for your particular retirement and other financial objectives. If you would like to learn more about annuities and how they may benefit you, feel free to reach out to us directly at , or you can send us an email with any questions that you have by going to our secure online contact form. We look forward to meeting you.
Getting Out Of An Annuity May Be Difficult Or Impossible
This is a major concern relating to immediate annuities. Once you contribute the money to fund an immediate annuity, you cannot get it back or even pass it on to a beneficiary. It may be possible for you to move your money into another annuity plan, but doing so could also leave you subject to fees.
On top of the fact that you cant get your money back, your benefits will disappear when you die. You cannot pass that money to a beneficiary, even if you have a lot of funds left when you die.
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Characteristics Of Immediate Annuities
- One steady payment for life.It takes away the anxiety that you may live longer than your money, says Steven Weisbart, an economist with the Insurance Information Institute of New York City, a nonprofit association financed by the insurance industry.
- Theyre simple. The company that provides the annuity handles the investment responsibilities.
- Theyre low-risk. Thats assuming the provider is financially secure. The funds are guaranteed by the assets of the insurer and arent subject to the vagaries of financial markets.
- Theyre tax-efficient. If you use tax-deferred vehicles to fund them, you only pay taxes on the checks you receive rather than on the entire lump sum.
So-called qualified immediate annuities are those that are funded by tax-sheltered accounts. That can include a distribution from a company retirement plan, an IRA or other tax-deferred retirement funds, such as a simplified employee pension IRA, or SEP-IRA. You can also transfer money from a deferred annuity into an immediate annuity. Payouts from a qualified immediate annuity are subject to taxes, of course.
However, if you are financing your immediate annuity with funds that have already been taxed, the amount of principal paid out each month is not taxable since thats considered a return of capital. In such cases, the annuity provider will indicate the amount of the monthly payout that would be excludable from taxes, generally at the time you receive a quotation.
Income For Life Is Nice But It Comes At A Price
by Kim Lankford, AARP, May 21, 2020
En español | Having some guaranteed retirement income is particularly attractive in today’s world of financial uncertainty. If you know you have a check coming every month for the rest of your life, you can worry less about stock market volatility or outliving your savings. You may also have some regular income from Social Security but it may fall short of covering your bills. If you aren’t lucky enough to have a pension, you may be considering an annuity to boost your guaranteed income. But there are several types of annuities with a wide range of fees, nuances and purposes. Some are more suitable for retirement income than others.
Here are five things you need to know before you buy one.
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Annuities Can Be Useful For The Very Old
This is the most important part.
As you get into late 70s, your physical and mental ability to manage investments may not be that high. You may not be able to manage your investments as well.
Any health ailments may also compromise your ability to manage your investments. Unless you have a trusted friend or a family member who can devote time and help you, annuity purchase may be a good idea.
Moreover, as you grow older, basic tax exemption limit also goes up . Annuity rates also improve with age.
You need to consider the quantum of annual annuity receipts and other income to see how tax efficient purchase of annuity plan will be.
How To Buy An Annuity
Annuities can be purchased from insurance companies, banks, independent brokers and financial advisors.
Purchasing an annuity is an important decision. To buy one, you must follow a step-by-step process.
Steps for Purchasing an Annuity
Stress-Free Annuity Buying
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