Annuities Continued…

Variable Annuities offer a range of investment funding options (similar to an IRA). The return on the investment can go up or down dependent upon market conditions. Some Variable Annuities also offer a fixed account option that allows you to balance your investment risk. Variables offer tax-deferred growth and a death benefit that assures that if you die before the insurer has started making payments to you, your beneficiaries will receive a guaranteed sum.

Two Choices: Deferred or Immediate

The difference between a Deferred or Immediate Annuity lies in the specific needs of the investor. A Deferred Annuity is generally purchased with flexible payments and is paid out after retirement. An Immediate Annuity is purchased with a lump-sum and paid out at an earlier time. So, a Deferred Annuity serves the needs of an investor saving for retirement, whereas an Immediate Annuity is likely to serve the needs of a retiree looking to invest a large sum of money.

Because it is tax-deferred, a Deferred Annuity is not a good idea for money you may need soon. All the typical IRS penalties apply for withdrawals made before the age of 591/2, and the insurer may impose early withdrawal penalties as well. In addition, it is best to understand that an Immediate Annuity cannot be withdrawn without significant penalties too.

Distributions

The choice of how and when to begin distributions from your Annuity is complicated and requires an understanding of both the insurer's contract and the tax laws affecting your investment. In general, you can choose to have a lump sum distribution or an annuitized (period payment) distribution. Some Annuities also offer an option for you to determine a set distribution amount. Payments from Fixed Annuities will not change, but payments from Variable Annuities will fluctuate with market conditions.

In addition, many Annuities offer Options for payment guarantees. The most typical of these being: guaranteed income for life (for yourself), guaranteed income for life plus a specific number of payments to a beneficiary upon your death, and guaranteed lifetime income for two.

Things to Consider Before You Buy

1. Money put in an Annuity is post-tax. To maximize your retirement savings it might be wise to first fully invest in some pre-tax dollar vehicles such as IRAs or 401ks.
2. Annuity expenses can vary and hidden charges are not uncommon. If the Annuity contract is too expensive it will offset any gains the investment may reap. Check an independent rating service to compare fees before your purchase.
3. Earning from Annuities are ordinary income. The tax implications are significant if the income from an Annuity will affect your tax rate.

By MS Kauffman