Learning Center (Annuity)

The key benefit of an annuity is that it’s income tax deferred.  As you probably know, sheltering your hard-earned dollars from the taxman is one of the best ways to make your savings grow faster.

Tax deferred means you’ll have to eventually pay taxes on the income you earn in an annuity.  The idea is, when you retire, you’ll most likely be in a lower income tax bracket than you are now.  Until then, the money you would have paid in taxes can be used to increase your earnings. 

Here’s how:

• The money you put in earns interest
• The interest on the money you put in earns interest

Don’t make the mistake of thinking you’ll get additional tax-deferral benefits if you select an annuity as your IRA investment.  The government doesn’t see it that way, so you’re better off keeping your annuity separate from your IRA. 

Basically, there are two types of annuities. 

FIXED ANNUNITY provides a fixed guaranteed interest rate for a fixed period of time.  Here’s how it works:  You give a check to an insurance company and they invest it.  If their investments do poorly, too bad for them.  They still pay you the interest rate they promised.  The company issuing the annuity may adjust the interest rate up or down, but it will never go below the guaranteed rate. 

·        Bottom line – with a fixed annuity, the insurance company bears the risk.  This makes a fixed annuity a great choice for conservative investors.

VARIABLE ANNUITY does what its name says: it offers variations.  You choose your investments from a list of funds within the annuity.  These funds, which can be stock, bond or money market funds, or a combination, are commonly known as subaccounts.  They’re managed by experts with strategies that range from aggressive to conservative.  You receive a variable rate of return based on the performance of the funds in each subaccount.

Bottom line – with a variable annuity, you bear the risk.

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