Annuities
An annuity allows a customer to deposit money (premiums) with an insurance company that can earn interest and grow on a tax-deferred basis with the agreement that the insurance company will then provide a series of payments back to the customer at regular intervals.
People typically purchase annuities to provide or supplement retirement income they will receive from Social Security, pension benefits, investments and other sources. You can convert your annuity into a stream of income that can then be paid over a fixed period or for your lifetime. You can take withdrawals of varying amounts when you need the income.
There are generally two different types of annuities
Immediate
Provides income payments that normally begin within a year after the premium is paid.
Deferred
Provide income payments that begin later, often after many years. Deferred annuities are designed for long-term savings purposes.
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Available to purchase using a single lump sum, or with flexible premiums over time.
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When it comes time to take income from your deferred annuity, you will have many options available to meet your needs.
Fixed Interest Rate Annuity
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Deposits accumulate at fixed rate of interest set by the company.
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Have a guaranteed minimum interest rate that will be earned.
Indexed Annuities
Indexed annuities do not directly participate in any stock or equity investments. Most indexed annuities permit owners to participate in only a stated percentage of an increase in an index, and also impose a “cap rate” that represents the maximum annual account value percentage increase allowed to contract owners. An investment cannot be made directly into an index.
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Interest is based on changes in a major index such as the S&P 500
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Over the long-term, an indexed annuity may offer the potential for greater earnings than a fixed annuity but may have years, when the index is down, when no interest will be credited.
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Downside protection through minimum guarantees to ensure that your cash value will not decline due to decreases in the Index.
FAQS
Can I exchange one annuity for another without paying taxes?
Yes you can. IRC Section 1035 allows for a tax-free exchange of one annuity for another. Before you decide to exchange one annuity for another, you will also want to consider any surrender charges that may be applied upon surrender of the contract as well as the new surrender penalty schedule for the new annuity you plan to purchase.
If I take a withdrawal from my non-qualified annuity, how is it taxed?
Withdrawals from annuities purchased after August 14, 1982, are taken from earnings first. You will be required to pay income taxes on all earnings taken from the contract. Once you have withdrawn earnings, withdrawals will be made from the premiums paid into the policy. Withdrawals of premium are not subject to income taxes.
If you take withdrawals prior to age 59 ½, withdrawals that are made from the earnings in your contract may also be subject to a 10% premature distribution penalty. Withdrawals of premiums paid are not subject to the premature distribution penalty.
Will my beneficiary have to pay taxes on my annuity?
Yes, beneficiaries will be taxed on the tax-deferred interest when they receive those dollars. However, if a beneficiary is the spouse of the owner and the owner dies, he/she may elect to continue the annuity and postpone taxes. If the beneficiary is not the spouse and the owner dies, then the funds must be totally withdrawn within five years or they may be received over the beneficiary’s life expectancy, as long as the beneficiary elects this option within the first 12 months following the annuity owner’s death.