We’re here to help you in understanding annuities. First, let’s start with a definition. An annuity simply means that you get money on a fixed interval. When it comes to insurance annuities, there are a few different types. These include variable annuities, fixed annuities, and fixed index annuities (FIAs). Each of these products may offer a recurring income payment. However, only fixed annuities and FIAs offer protection of principal. Therefore, those are the types of annuities our firm focuses on. These products are not investments but are, instead, insurance products.
So, what is an annuity? It’s a contract between you and an insurance company. Some annuities may pay out an interest rate when its associated index rises. Others, such as a fixed annuity, remain the same throughout the term of the annuity. In both cases, your principal is not at risk in the stock market. With an FIA, if the market goes up, you may see an increase in your return. But, if the market goes down, you don’t lose.
Taxes and Annuities
Earnings in an annuity happen tax-deferred. This means the money grows without paying taxes on it. Only when you take the money out does the income become taxable. Even then, you pay your regular income tax rate. For those who wish to have a tax-deferred income option, an FIA or fixed annuity may be helpful in that way.
Other tax benefits may be possible as well, depending upon your situation. In the case of early retirement profit-sharing, for example, you may be able to roll over your plan into an annuity. This may be especially helpful if you are under 59 1/2 years old but wish to retire now.
The specifics of this type of transaction impact the tax implications, of course. So, be sure to seek professional advice before rolling money into an annuity.
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