Fixed Annuities: The Missing Piece of Your Retirement Planning Puzzle?

Increasingly, the responsibility for funding a comfortable retirement is shifting from the employer and the government to the individual. Many people contribute to employer-sponsored retirement plans and IRAs, but there is another tax-advantaged retirement vehicle that shouldn’t be overlooked: annuities.

Annuity Essentials

An annuity is a contract between an individual and an insurance company. They’re long-term, tax-deferred investment vehicles designed for retirement purposes. In exchange for purchasing an annuity (either through a lump-sum payment or in periodic installments), the buyer receives a regular payment during retirement.

A fixed annuity earns a guaranteed rate of interest for a specific period of time.1 Likewise, the amount of the benefit paid out at retirement is fixed. This feature can help when plotting a budget for your later years — you’ll know in advance how much regular income you will receive. However, in exchange for less risk, the fixed annuity buyer gives up the potential for a larger investment return. Conversely, a variable annuity allows the buyer to choose from a variety of investments that will change in value. A variable annuity buyer takes on more investment risk in exchange for greater growth potential.

A Balanced View

Tax advantages — One advantage to owning a fixed annuity is that you can accumulate money on a tax-deferred basis. This means that the earnings in your annuity are not taxable until you “annuitize,” or begin receiving payments — at a time when you may be in a lower tax bracket.2

Generous investment guidelines — There are generally no contribution limits on annuities. This can be especially advantageous if you’ve fallen behind in investing for your later years, or if you’re looking to minimize taxes while investing for retirement and have contributed the maximum amounts to other tax-advantaged options. Unlike other retirement vehicles, annuities may allow you to continue contributing even after you’ve retired and whether you have earned income or not.

Estate planning benefits — If you die prior to receiving money from an annuity, your beneficiary may still receive a death benefit, although he or she will have to pay taxes on the amount.

Fees and penalties — As with other tax-advantaged retirement accounts, you may have to pay a 10% IRS penalty if you withdraw money from an annuity prior to age 59½. In addition, you may have to pay a “surrender” charge to the issuing insurance company if you cancel your contract prematurely.

Fixed Annuities for Retirees

Already retired? You can still purchase a fixed immediate annuity. In exchange for contributing a lump sum to a fixed annuity, you can immediately begin receiving income payments for a specific length of time. This may be beneficial to a retiree in good health who is concerned about outliving assets.

One annuity can be very different from another, and the rules surrounding them are complex. But if steady income and preservation of principle are goals you want to pursue, a fixed annuity may offer advantages worth looking into.

1. Variable and fixed annuities are long-term, tax-deferred investment vehicles designed for retirement purposes; but the variable annuity contains both an investment and insurance component. Variable annuities are sold only by prospectus. Guarantees are based on claims paying ability of the issuer. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.

2. Withdrawals of earnings are taxed as ordinary income.

Investors should consider the investment objectives, risks, charges and expenses of the variable annuity contract and sub-accounts carefully before investing. The prospectus contains this and other information about the variable annuity contract and sub-accounts. You can obtain contract and underlying sub-account prospectuses from your financial representative. Read the prospectuses carefully before investing.

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