Annuities
Creating a reliable retirement income stream can be difficult given the many factors that can influence your strategy, such as market volatility, inflation, tax rates, and how long you will live. In order to help mitigate some of the risks, many people include annuities in their investment plans. An annuity can help protect your retirement lifestyle by providing guaranteed income that can last as long as you need it.
1 You may choose to receive periodic payments for a certain number of years, or for the rest of your life (or the life of your spouse or any other person you designate).
How Do Annuities Work?
An annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase an annuity contract by making either a single purchase payment or a series of purchase payments.
In purchasing an annuity, many individuals supply funds to the issuing insurance company, creating a pool of assets from which the insurance company can draw to make income payments. As lifetimes vary, the assets contributed by those with shorter lifetimes can be used to sustain income payments for those who live longer than anticipated.
While annuities may be purchased within retirement account, many investors don't see the need to pay for a benefit (tax-deferral) that they may already be receiving. After-tax annuities can provide investors with an opportunity to supplement their retirement savings on a tax-deferred basis. This benefit can be particularly attractive because there are no limits on contributions as there are with IRAs and employer-sponsored retirement plans.
Some annuities include a death benefit that guarantees your beneficiary will receive a certain amount (typically at least the amount of your purchase payments) in the event of you pass away before the insurer has started making payments to you.1 If you die, your beneficiary will receive the greater of: all the money in your account, or some guaranteed minimum (such as all purchase payments minus prior withdrawals).
Types of Annuities
- Deferred annuities – are designed to help you accumulate retirement savings on a tax-deferred basis. While interest earnings are not taxed until they are withdrawn, withdrawals taken prior to the end of the annuity's surrender period and/or prior to the owner attaining age 59½ are subject to penalties.
- Immediate annuities – are used to generate retirement income. They enable you to turn a portion of your retirement savings (typically a lump sum) into a steady stream of income payments. This is known as annuitization.
Annuities can be further classified as either fixed or variable:
- Fixed Annuities
With a fixed annuity, you provide the insurance company with a series of purchase payments or a lump sum and the insurer agrees to pay a fixed interest rate over a specified period of time. The insurer takes the majority of the risk, and pooled assets are invested in fixed income securities at the insurer's discretion. While a fixed annuity may provide more security of principal than a variable annuity, the upside potential may be limited.
- Variable Annuities
As with fixed annuities, you provide the insurance company with a lump sum or a series of purchase payments, and the insurer agrees to pay interest for a specified period of time. However, with a variable annuity, the interest payout has the potential to increase or decrease in line with the performance of the annuity's underlying subaccount investments. Variable annuity owners may choose from a selection of available investment options, typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.
It's important to note that when you take your money out of a variable annuity, ordinary income taxes — as opposed to lower capital gains tax rates — will apply. In general, the benefits of tax deferral may outweigh the costs of a variable annuity only if you hold it as a long-term investment for retirement and other long-range goals.
Your Legend Group financial advisor can help you determine if an annuity may be right for you,
and provide guidance throughout the selection, accumulation and annuitization processes.
1Payments of guaranteed income in regards to living and death benefits offered by annuity contracts are subject to the claims-paying ability of the issuing insurance company.
If you are investing in a variable annuity through a tax-advantaged retirement plan (such as a §401(k), §403(b) or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity's other features, such as lifetime income payments and death benefit protection.
Early withdrawals prior to age 59½ may be subject to surrender charges and a 10% tax penalty.
Legend Equities Corporation and its affiliates do not provide tax information or advice.
Before investing in a variable annuity, consider its investment objectives, risks, charges and expenses carefully. The prospectus contains this and other information. Prospectuses for both the variable annuity contract and the underlying funds can be obtained by contacting Legend Equities Corporation. Please read the prospectus carefully before you invest or send money.