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Fixed Annuities

Fixed annuities are a common investment among retirees.  An annuity is a contractual investment through an insurance company offering the investor certain assurances.   There are three ways in which an annuity can be defined:

  • How money is invested (fixed-rate or variable)
  • Method of investment (single or multiple payments)
  • When distributions commence (immediate or at some future date)

For investors, the biggest selling points of an annuity are tax-deferred growth and certain guarantees.  Generally, the biggest distinguishing factor is whether the annuity is fixed rate of variable.

Some annuity characteristics

Annuities can be set up as either qualified or nonqualified.  A qualified annuity is used for retirement plans and they are usually funded with pre-tax dollars.  A non-qualified annuity is one that is funded with after-tax dollars and can be purchase by pretty much anyone.

  • Tax-deferred growth
  • Distributions of growth/interest are taxed as ordinary income
  • Distributions of principal from non-qualified accounts are never taxed
  • Annuitization is always an option
  • Upon death, proceeds pass free of probate (if specific person named
  • Each annuity contract has an owner, annuitant and beneficiary
  • The same person can be the owner, annuitant and/or beneficiary
  • Owner decides who will be the annuitant and beneficiary
  • All commercial annuities are issued by an insurance company
  • Annuities are sold by banks, brokerage firms, and insurance companies
  • Any guarantees are backed by the insurer

Annuities are a fantastic risk management tool allowing the investor to meet certain needs or increase their likelihood, because of their underlying guarantees.

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