Annuities

Do you own an IRA, hold a Keogh, or still have assets in a qualified retirement plan that was offered by a previous employer? Then perhaps now you have to think about the best way to withdraw the funds, as the IRS requires at age 70½, while making sure that you don’t outlive your income.

One choice is to remove the money all at once and pay the tax. That step, however, may put you in a higher tax bracket is is usually not wise. Another option is to go along with the government’s guidelines and calculate the Required Minimum Distribution that you must withdraw each year after you turn 70½. But what if there was a way to not have to do those calculations and also not worry about tax law changes and market fluctuations that could affect retirement accounts every year?
 
A tax-qualified, fixed immediate annuity will spread the tax liability over your projected lifetime and automatically satisfies the IRS requirements, so you will never have to calculate the required minimum distribution. A check will arrive every month, or whichever schedule you select, for the rest of your life—no matter how many years that might be (guarantee is based on the claims-paying ability of the annuity company). All you will have to do is pay the income tax and spend the balance of the money as you wish, or save it.

Note that even if you have several IRAs, you may want to add up the balances and then use a fixed immediate annuity in just one IRA to provide the required minimum distribution for all three.  Note that you must take a required minimum distribution form each type of retirement account you have.  You cannot for example just take a distribution form your IRA if you also have a 401k account.  You must make a required minimum distribution from both accounts.

Make sure you tell the immediate annuity company that you are using the payments to meet your required minimum distributions so that the payments are properly structured and will increase as you age.

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Fixed annuities can be popular among seniors. They are easy to buy, you know exactly how long you must tie up your money, and the IRS will let you defer the income tax on the earnings. 

But one point that may have stopped you from investing in an annuity is that some traditional fixed annuities do not lock in the interest rate for the duration of the contract. This means that after the initial period, which is typically one year, the return that the annuity company pays could possibly go higher or lower each year thereafter. However, there is a type of annuity that fixes the return for the entire contract’s term. This way you will know exactly how much you’ll earn while you own the contract–see the fixed annuity calculator for a projection.  

CD-annuities (also known as multi-year guarantee annuities) provide level interest rates for the entire term so you won’t get any surprise notices during this time. You select the term, which generally ranges from three to ten years when you make the investment. At the end of the term, you will usually have a 30-day window to withdraw all or part of your money, or renew the contract for another multi-year period. The withdraw charges expire when the term ends.

As with traditional annuities, there are no income taxes on the earning while they remain in the account. Therefore, you won’t get a 1099 form to file with the IRS each year. Nor will you have to worry about income taxes if you renew the contract at the end of the term, and you get to name a beneficiary. This means that if you die while you own the CD-annuity, your heirs will quickly receive the account’s value without going through probate. Then they’ll  have the option to take a lump sum payment, or a systematic payout.

Note that if you also get an annuity with a market value adjustment (MVA), and interest rates do decline, you can cash out your annuity prior to term and be rewarded for the MVA adjustment.  Of course, always buy annuities with the intention of holding to term.

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Many seniors purchase fixed annuities for potential safety, tax savings, and asset protection. In some cases, insurance companies will offer a higher interest rate for a limited time period to encourage those investments. But what happens after that time period ends? Other than the minimum rate guarantee, do you have any assurance that you will still get a good return? 

Pass-through annuities could possibly reduce that concern by limiting the amount of money the company makes on your investment.

To achieve a basic understanding about how this works, let’s look at a hypothetical example (please note that this example is for illustration purposes only and is not based upon the performance of any particular annuity product).  Say you bought a fixed annuity that had the traditional method of crediting interest. If the first year’s rate included a 5% bonus, plus the 3% minimum, you could be looking at 8%. And you might think that’s pretty good. 

Then year two rolls around and it’s time for rate renewal. The annuity company might only be contractually required to the minimum interest rate, even if they earned more than that on your premium payments. 

With a pass-through annuity you can potentially achieve a better result, since there is a contractual guarantee in place that limits how much of the earnings an insurance company can keep. Once an insurance company takes its share, the rest of the investment return is “passed through” to you. 

Of course, any additional fees that are charged for this guarantee could reduce your overall return. The interest rate and pass-through features of these annuities can also vary from company-to-company. Annuities are designed for long-term investing. Ordinary federal income taxes and a 10% tax penalty could apply to withdrawals taken prior to age 59½. Annuity benefits and guarantees are based upon the claims-paying ability and financial strength of the underlying insurance company, and are not government-insured. Surrender charges can also apply to withdrawals, based upon the time the insured has been invested in the annuity. 

Because there are so many annuities on the market, get retirement help by locating an experienced annuity agent.

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Stability and safety are important to many seniors, and these are only two of the reasons why immediate annuities are popular investments. A check arrives every month and part of the income is considered a tax-free return of your principal. As long as the annuity company is financially sound, the payments will continue for the life of the contract (annuities are guaranteed by the claims-paying ability of the issuing company).

However, consumers sometimes believe that immediate annuities are illiquid, irreversible investments, and cannot provide for future lifestyle changes. Nonetheless, there are some immediate annuities with options that may add flexibility to your financial plan.

Immediate annuities can possibly include an option that would allow you to receive extra cash at specific anniversary dates. For example, this might be at the 5th, 10th, or 15th anniversary of your investment. Exercising this option will reduce your future payments (the distribution may be fully taxable, so consult with your tax professional).

Suppose you needed money to cover an emergency, like paying for caregivers or a home repair. Some annuity companies will let you take up to six payments at once. You would not, however, receive checks for the following six months (payments may be fully taxable so consult with your tax professional).

You may also have the ability to provide a cash benefit from your immediate annuity to your heirs. This would be a pre-determined percentage, such as 25% or 50% of the amount of your initial investment. Selecting this option will reduce your monthly annuity checks, and may have tax consequences.

Annuities are so varied and there are so many different options provided, it’s essential to speak with a retirement advisorto see a range of products and solutions available.

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Retirees want to secure their future financial status. Fixed annuities can play a big part. Let’s consider how fixed annuities can help individuals and families create a future supplemental retirement income.

While fixed annuities provide several benefits in the form of increased rate of growth in savings through tax-deferred growth, competitive returns, and security (through various guarantees) they also offer another important benefit– insurance against financial instability. You can invest as much as you want in a fixed annuity, leave it there to grow as per the rate of interest promised to you, and withdraw money when you need it. Lastly, you have several choices about how and when to withdraw your money.

Here are several benefits that contribute to stability:

1.      A fixed annuity is often an appropriate choice for seniors because it offers the promise of a steady income when annuitized. Buy ‘term certain’ fixed annuities if you want to collect income over a particular time period only. Or buy a life annuity if you want to receive income for your entire life.

2.      Several fixed annuities offer special features that can be useful for seniors. You can receive systematic or flexible withdrawals. This gives you the freedom and pleasure of creating your own “pension.”

3.      Every fixed annuity provides a principal guarantee, so you can be assured of receiving at least the initial premium you paid (less potential surrender charges or other costs).

4.      You may choose a nursing home waiver feature. This would relieve you of paying surrender charges if you fall sick at any time during the annuity period where you are required to cash in your annuity to pay for your nursing home bills.

Note that the amount of “payback” you receive when you annuitize depends the amount you have invested, as well as on your life expectancy. But be vigilant about all the details of the annuity contract before you sign. Note that fixed annuities once annuitized cannot be surrendered for value.  Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59½ are subject to a 10% penalty.  Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims-paying ability of the insurance company. Fixed annuities should be considered long-term investments. Riders such as nursing home waivers may have additional costs.

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