An Overview of Annuities
Annuities (Fixed):
Annuities can be a valuable component in retirement planning. Annuities are investment contracts issued by insurance companies. They enjoy tax deferred status by the government and are backed by the claims paying ability of the insurance company. Both qualified and non-qualified money can be used to fund annuities. Since they are meant as retirement vehicles the government charges a 10% income tax penalty on the earnings if the funds are used prior to age 59 ½.
Multi Year Guaranteed Annuities (MYGA):
Multi Year Guaranteed Annuities offer a fixed rate for a period of years, usually from 3 to 7 years. The rate is fixed, and the interest grows compounded on an annual basis. At the end of the term one can access their funds without penalty or rollover the funds into another annuity on a tax-free basis.
Equity Index Annuities (EIA):
Equity Index Annuities are vehicles which, like all annuities, are tax deferred. They offer the potential for higher growth because the rate of return is tied to the performance of an equity index (such as the S&P 500 or the Nasdaq). Usually the growth rate is capped on an annual basis and the downside (the floor) is 0%. This means that in up years the annuity owner earns interest, however, in down years there are no losses. Additionally, most EIA contracts lock in your gains on an annual basis.
EIA annuities often include an income option which guarantees a minimum income for life depending upon the age of the annuitant. Some EIA contracts that offer income even have provisions where the income will grow if the underlying indices have a positive return on an annual basis.
In Summary, fixed annuities should be considered due to their safety, tax deferred status and versatility depending upon your financial goals and situation.
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