Annuities: Attractive Opportunities

If you're interested in long-term investing, consider an annuity. Annuities provide great flexibility in building retirement income or meeting other long-term financial goals. An annuity is a contract between a you, the purchaser, and an insurance company that offers protection against outliving your income. Annuities and CDs have several important differences. Certificates of Deposit are FDIC insured; annuities are not. The underwriting insurer guarantees the principal of an annuity.

Unlike CDs, annuities have the added advantage of earning tax-deferred interest. That is, the interest you earn accumulates on a tax-deferred basis. You don't pay income tax on your money until you receive it. Depending on how you withdraw the money, the tax savings could be significant.

Annuities are either qualified or nonqualified. Qualified annuities are generally Individual Retirement Annuities (IRAs) and may be tax deductible under certain eligibility guidelines and the interest you earn accumulates, tax-deferred. However, the money you withdraw or receive is subject to income taxes. (Withdrawals made prior to age 59½ may be subject to a 10% IRS penalty tax. Withdrawals may be subject to surrender charges.)

IRA contributions are limited to a maximum of $3,000 per year. If you are age 50 or older, you may be eligible to contribute an additional $500 make up contribution. You may defer distribution of your money until age 70½.

Nonqualified annuities are purchased with money that you have already paid taxes on. The interest you earn is not taxed until you receive it.

Fixed annuities may only be similar to CDs in that they guarantee a set interest rate for a specified time. Most companies offer you the choice of interest rate guarantee periods. This type of annuity gives you freedom to make payments in various amounts over time. This lets you accumulate money at your own pace.

Annuities may be structured in a variety of ways. A single premium deferred annuity is purchased with one lump sum, usually at least $5,000. A flexible premium deferred annuity is just that - flexible.

Most annuity contracts are long-term plans designed to provide you with retirement income. To encourage long-term accumulation, most contracts charge surrender fees if you cancel your contract. Typical surrender charges decline to zero percent over a period of time.

When you're ready to receive your retirement income, you will have the option of "annuitizing" your contract. Annuitizing means that you choose to receive your money in a series of equal payments - monthly, quarterly, semi-annually, or annually. Payments can be structured to last for your lifetime or for the combination of two lives - you and your spouse - or for a specific period of time. Some annuities even allow you to systematically withdraw money without having to annuitize the contract.

Annuities offer enticing tax benefits and they make good long-term investments. If you make a withdrawal from your annuity prior to age 59½, you may pay a 10% IRS penalty in addition to regular income taxes.

Unlike life insurance policies, annuities are designed to provide income for retirement rather than passing money on to your estate. However, annuities can be structured to provide a death benefit to your beneficiary without going through probate.

If you are purchasing an annuity to fund a tax qualified retirement plan (IRA, SEP, SIMPLE IRA) you should be aware that his deferral feature is available with any investment and is not unique to our annuity. Carefully consider the features and benefits of the annuity in making the decision to purchase it.