F.A.Q.'s
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1. How does an Annuity differ from a traditional Savings or Brokerage account?
When you put money into a Savings or Brokerage account, you're free to withdraw that money as you see fit. However, the income you earn from that money...whether it's interest from your bank, or gains from your investments, are normally subject to taxes immediately. An Annuity on the other hand, is a contract between you and an Insurance Carrier that requires it to make payments to you, (or the "Annuitant"). Either right away, or in the future. Once you fund your Annuity, you can't simply withdraw your money @ anytime, without consequences. Keep in mind though...that money gets to grow on a "Tax-Deferred" basis.
2. What Benefits do Annuities offer?
Annuities offer Tax-deferred growth...so even if the value of your Annuity increases year after year...you won't be required to pay taxes on that growth until you actually start taking withdrawals. Furthermore, Annuities can help protect you from the one thing Retirees fear most: Outliving their money! Keep in mind, you can structure an Annuity to make payments for the rest of your life and you can rest assured that you'll keep receiving distributions...no matter how long that happens to be.
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3. What are some of the Drawbacks of Annuities?
Aside from their complicated nature, the greatest drawback associated with Annuities, are the fees that come with a number of them. Annuities are often sold by Brokers, (focusing mostly on the Variable type), and therefore, often come with commission fees that can be as high as 10%. A number of Annuities also include annual fees concerning their select Riders. Furthermore, if you attempt to take money out of your Annuity too soon, you could possibly incur a "Surrender charge". Surrender charges often hover around the 7% mark if you withdraw your money after the first year, and then generally go down a point by 1% each year until they reach Zero. This is normally associated with the Carriers deferred products.
4. What types of Annuities are there?
There are Two (2) basic types of Annuities. Deferred and Immediate. With a deferred Annuity, you don't get payouts right away. Rather, your Annuity has what's called an "Accumulation Period", during which premiums are paid into the contract, before payouts are dispersed. With an Immediate Annuity, you can begin receiving payments shortly after you pay into the contract. Within these Two categories, Annuities can also be Variable or Fixed. With a Fixed Annuity, your guaranteed a Fixed, predetermined rate of income. With a Variable Annuity, that's not the case. Your principle is invested, and your payouts are based on how well your account performs. If you Opt for a Fixed Annuity, you won't have to worry about choosing your own investments. With a Variable Annuity, you get to decide, (or let a Broker decide), on how the principle is invested...which could be a good thing...or a bad thing.
5. How much can I contribute to an Annuity each year?
Unlike traditional retirement accounts, like 401k's and IRA's, that offer Tax-deferred growth...Annuities don't come with an annual contribution limit. If you want to exceed the current IRS contribution limits...you might consider an Annuity as an option.
** For instance, concerning the 2019 Tax year, you can now contribute $6,000 to an IRA and $7,000 if you're 50 yrs. or older.
6. Can I withdraw money from an Annuity @ any time?
Withdrawing your money too soon could come with serious Tax/Penalty implications. As is the case with a 401k or an IRA, if you withdraw money from an Annuity before you reach age 59-1/2, you could be hit with a 10% early withdrawal penalty. Also, if you take out your money too soon, you may also hit with a Surrender charge. as well.
7. Will I pay Taxes on Annuity withdrawals?
Just as you'd pay Taxes on distributions from a traditional 401k or an IRA, you'll pay taxes on Annuity withdrawals as ordinary income. The process by which Annuities are taxed can be somewhat complex. Generally speaking, Annuities are taxed on a "last-in", first-out" basis. When you take Annuity withdrawals, the money that comes out initially is attributed to the earnings portion of your account, and so that money is taxed as ordinary income. However, once the value of your Annuity falls below the original premium amount you put in, your withdrawals will no longer be subject to taxes, because the money you used to pay those premiums had already been taxed up front.
NOTE:
An Annuity can be a useful...albeit, complicated, retirement planning tool. Just keep in mind that the terms of an Annuity contract can vary from one product to the next. If you're thinking of purchasing one, be sure to understand exactly what you're signing up for.
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