How To Choose the Best Fixed Annuity
Most people have heard of fixed annuities. Often they won't try them because they're afraid they'll lose money. Their fear stems from lack of information on a fixed annuity. A fixed annuity is very similar to a CD at a bank but has additional features that make it far more attractive. Just like a bank, you have guarantees on interest rates.
Fixed annuities are also called immediate or deferred annuities. The difference lies in how you use the product. A person that wants a deferred annuity uses it more like a CD. They don't take payments from it. The immediate annuity converts to payments over a specific number of years, for a specific amount or payments that you'll never outlive. Some people like a guarantee that their heirs get any unused principal. That's available too.
While the tax-free growth of interest is a real plus over the taxable interest of the CD, there are some precautions you need to take. If you're under the age of 59 and take any money from your fixed annuity, you'll find the IRS imposes penalties. An annuity is a retirement vehicle and just like any retirement account, you pay a10 percent penalty on the growth if you take money before 59 . That is, of course, unless you take substantially equal periodic payments that last until that age or at least 5 years. Then the IRS approves it with no penalty.
Just like a CD, you have a penalty if you remove the money before a specified time. Like most CD's, fixed annuities allow you to take interest at any time but there's a percentage penalty if you take the initial deposit. The penalty is normally on a sliding scale that reduces as the contract gets older. It varies, but normally averages between four and or five percent. While the length of the surrender period varies, again the average is around seven years. Watch out for contracts that have a lifetime surrender charge unless you annuitize.
There are exceptions to the surrender charge. Many contracts offer the ability to remove funds of as much as ten percent without penalty. This amount may be available each year or once for the life of the contract. Almost every annuity allows you to take the interest penalty free each year and some people use the annuities that way, just as they'd use a CD.
Annuity taxation occurs in two ways. If you remove the money from a fixed annuity in a lump sum as a withdrawal, the government taxes it with LIFO rules. This means, last in, first out. Since the last in is always interest, you pay taxes on the interest you withdraw. Unlike a CD, where even if you reinvest the money, you still pay taxes, you only have taxation of annuity interest once you remove it.
Immediate annuities have different tax rules. If you use the fixed annuity as a deferred annuity and then annuitize it later, it follows these rules also. Part of the payment each year is principal and part of it is interest, according to the IRS regulations.
To calculate the amount you pay in taxes each year you use an exclusion ratio. The exclusion ration is how much you exclude from that contract's income. To find it, you need to know three things; your life expectancy, your payment and the amount you invested. You simply multiply your payment times the number of years for life expectancy. If you receive $800 a month and have a life expectancy of 22 years, you'll get approximately $211,200 over the lifetime of payments if you collect in full. If your initial investment was $100,000, you divide that number by 211,200 and get an exclusion rate of 47 percent. In this case, you'd only pay taxes on 53 percent of your annual income from the fixed annuity.
There are great reasons to select fixed annuities over bank CDs, but most financial planners suggest you use both types of investments and diversify your funds. This is the safest method of investing in the event of unforeseen disasters. Most people find that the annuity is a great method of establishing an income they'll never outlive or a way to achieve tax-deferred growth to pass on to their children. - 23218
Fixed annuities are also called immediate or deferred annuities. The difference lies in how you use the product. A person that wants a deferred annuity uses it more like a CD. They don't take payments from it. The immediate annuity converts to payments over a specific number of years, for a specific amount or payments that you'll never outlive. Some people like a guarantee that their heirs get any unused principal. That's available too.
While the tax-free growth of interest is a real plus over the taxable interest of the CD, there are some precautions you need to take. If you're under the age of 59 and take any money from your fixed annuity, you'll find the IRS imposes penalties. An annuity is a retirement vehicle and just like any retirement account, you pay a10 percent penalty on the growth if you take money before 59 . That is, of course, unless you take substantially equal periodic payments that last until that age or at least 5 years. Then the IRS approves it with no penalty.
Just like a CD, you have a penalty if you remove the money before a specified time. Like most CD's, fixed annuities allow you to take interest at any time but there's a percentage penalty if you take the initial deposit. The penalty is normally on a sliding scale that reduces as the contract gets older. It varies, but normally averages between four and or five percent. While the length of the surrender period varies, again the average is around seven years. Watch out for contracts that have a lifetime surrender charge unless you annuitize.
There are exceptions to the surrender charge. Many contracts offer the ability to remove funds of as much as ten percent without penalty. This amount may be available each year or once for the life of the contract. Almost every annuity allows you to take the interest penalty free each year and some people use the annuities that way, just as they'd use a CD.
Annuity taxation occurs in two ways. If you remove the money from a fixed annuity in a lump sum as a withdrawal, the government taxes it with LIFO rules. This means, last in, first out. Since the last in is always interest, you pay taxes on the interest you withdraw. Unlike a CD, where even if you reinvest the money, you still pay taxes, you only have taxation of annuity interest once you remove it.
Immediate annuities have different tax rules. If you use the fixed annuity as a deferred annuity and then annuitize it later, it follows these rules also. Part of the payment each year is principal and part of it is interest, according to the IRS regulations.
To calculate the amount you pay in taxes each year you use an exclusion ratio. The exclusion ration is how much you exclude from that contract's income. To find it, you need to know three things; your life expectancy, your payment and the amount you invested. You simply multiply your payment times the number of years for life expectancy. If you receive $800 a month and have a life expectancy of 22 years, you'll get approximately $211,200 over the lifetime of payments if you collect in full. If your initial investment was $100,000, you divide that number by 211,200 and get an exclusion rate of 47 percent. In this case, you'd only pay taxes on 53 percent of your annual income from the fixed annuity.
There are great reasons to select fixed annuities over bank CDs, but most financial planners suggest you use both types of investments and diversify your funds. This is the safest method of investing in the event of unforeseen disasters. Most people find that the annuity is a great method of establishing an income they'll never outlive or a way to achieve tax-deferred growth to pass on to their children. - 23218
About the Author:
John C. Ryan disperses his knowledge on how to find the best annuity for you. Want to learn more?? Come see us, for more information on fixed annuities .
posted by X - Men @ 3:59 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home