Posted by Fred Lake

What You Need To Know About Annuities

What You Need To Know About Annuities

If you pass away, you probably think about how life insurance can help protect your family. But what if you lived longer than you expect? You have to find a way to be able to live using only your savings.

An annuity is simply a contract between you and an insurance company. It allows you to contribute money in a tax-deferred account. You are then given two options in return - get regular payments as income - or when you need them at a later date, you can withdraw those funds.

Annuities are usually chosen by many people to get guaranteed income in retirement that is tax-deferred. In this article, we will take a look at the various types of annuities as well as review the tax advantages, payouts and structure.

Immediate Annuity

There are two main types of annuities, one of them is an immediate annuity. Soon after the account is activated, an immediate annuity starts paying an income. You have to decide whether you want to receive the income over your lifetime or a certain number of years so you can determine the payment amount.

Deferred Annuity

A deferred annuity, on the other hand, begins with an accumulation phase. The funds are contributed and the annuity grows tax-deferred. You will then receive a regular stream of income or a lump sum during the payout period which is delayed from when the annuity is first opened.

Single & Multiple-Premium Annuities

You pay a single lump sum at the start with a single-premium annuity and that sum then grows. As for the multiple-premium annuities, you can spread out your premium payments over time.

According to the risk and how they generate earnings, annuities fall in different categories. Fixed and variable are the two additional components to consider with annuities. The growth of fixed annuities is guaranteed based on a minimum interest rate for the life of the annuity.

The insurance company may periodically increase or decrease the rate with that in mind. It is based on the market for a specified time period although it would not go lower the guaranteed minimum interest rate. Do you want to minimize risk and want a guaranteed payout? Then fixed annuities could be good for you.

If you want to choose one or more investment options, called subaccounts, a variable annuity could be best for you to potentially grow your funds. Since variable annuity allows you to invest in stocks, bonds and mutual funds within the subaccounts, there is a greater possibility for growth. Of course, an investment risk of loss or both the principal and earnings comes with it. In addition, you usually have the options to moderate to aggressive growth options - or a combination of these.

Possible Tax Advantages of Annuities

What makes annuities as among the possible financial option is because it provides tax advantages. The contributed funds to the annuity grow tax-deferred and annuities have compound growth which means all funds will continue to earn invest including the interest on interest already paid. There’s more money to grow so that the sum of money grows faster when it’s tax tax-deferred.

Other tax advantages of annuities include not having a mandate for you to withdraw money from your annuity at a certain age. This means the funds can, therefore, continue to grow tax-deferred. For tax purpose, you may also decide the amount and timing of the payments you take.

Receiving Income from Annuities

There is some flexibility for pay-out being offered by annuities. Often an annuity is converted into regular payments or being “annuitized”. This may be for a specific time period or it could be paid out over your entire lifetime. A surviving beneficiary may also continue to receive paid out funds from annuities.

Withdrawals are another way to get funds from an annuity. These are lump-sum payments made at your discretion although you have to keep in mind that pre-tax payments and annuity earnings come with income tax upon withdrawal. If you withdraw funds before the age of 59 ½, a 10 percent penalty tax from the Internal Revenue Service is generally incurred.

The annuity structure covers the pay-outs and recipients of the income. The insurance company and the owner first enter into a contract for the annuity. The owner has the option to choose to be the recipient of the income or the income can be designated to be received by someone else. If in case there is someone to receive the subsequent income once the annuities die, the owner can also decide on that matter.

You may want to consider consulting a tax professional or an accountant to help you decide which Annuity is best for you. Since you have to learn about the types, tax advantages, pay-outs, and structure of annuities, consulting someone with a good foundation of knowledge may help you make the best choice.

Fred Lake
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