A Fixed Annuity (FA) is a useful tool for tax-deferral and income planning for retirement.
An FA is a contract between an individual or married couple with an insurance company. In exchange for a single premium payment or series of payments, the insurance company promises to pay the annuity owner a specific dollar amount, in periodic payments, based on the interest rate(s) specified in the annuity.
The rate of return is fixed in the contract and not based on any market index. The Fixed Annuity pays a fixed rate of interest, which can change periodically, but includes a guaranteed minimum rate. The principal is guaranteed and interest income is tax-deferred.
You may be subject to three specified rates:
First-year Bonus (promotional) rate
A high rate to lure consumers into buying the annuity but will stop at the end of the first year.
Accumulation Period rate
The rate during the period before the insurance company starts making periodic payments to the annuity owner.
Periodic Payments rate
The rate during the time of periodic payments to the annuity owner. Factors that affect the periodic payment amount are premiums paid, how long the FA is held, interest rate, and life expectancy.
Guaranteed Lifetime Income
An FA will guarantee a specified lifetime monthly income for the remainder of your life, starting at a certain age, as early as 60, if an Income Rider is added
The monthly income can keep up with inflation by paying for an Inflation Rider
Choose Your Withdrawal Options
An individual/couple will choose from among these variations:
Annuity payments begin right away or within 12 months after paying the premium
Annuity payments begin in the future, usually in retirement
Straight Life Annuity
Annuity payments are made until the annuity owner's death
Joint Life with Last Survivor Annuity
Annuity payments continue until the death of the surviving spouse
Term Certain Annuity
Annuity payments will be made for a specific period of time
Taxes and Fees
Any earnings are not taxed until funds are withdrawn
Taxes are due when monthly withdrawals start
Withdrawals before age 59½ incur a 10 percent tax penalty imposed by the IRS
Surrender charges (fees) occure for a period, usually 5-10 years, during which withdrawals over 10 percent of the principal will incur a penalty imposed by the annuity company