To determine if a fixed indexed annuity is right for you, it’s important to have full knowledge of how they work and how they may fit into your overall retirement plan. Understanding some common misconceptions about these unique financial products is a step in that direction.
1. Myth — Annuities are full of hidden charges.
Like mutual funds or any managed money solution, the indices used in index interest crediting strategies may include management fees. Insurance companies employ caps, participation rates, and spreads to limit the interest credited in exchange for protection from stock market risk or losses. There may be a charge for riders.
Financial professionals and the insurance company that issues the contract must disclose any and all fees associated with annuities. They must clearly explain withdrawal charges, which may be incurred if the client surrenders the contract during the withdrawal charge period or withdraws money beyond the penalty-free amount allowed in the contract.
2. Myth — Annuities are not tax efficient.
Annuities are long-term, tax-deferred products and can be a valuable solution for those looking to grow their retirement savings. Annuity earnings will grow on a tax-deferred basis until you begin taking withdrawals or surrender the annuity.* Over time, you will have the potential to build more retirement savings than you would have been able to had your earnings been taxed as income. However, there is no additional tax benefit associated with funding an annuity from a tax-qualified source like a 401(k) plan.
3. Myth — Annuities can’t keep up with inflation.
Income riders frequently offer payout rates that are indexed to inflation. This can help you keep pace with the rising cost of goods and services.
4. Myth — Annuities are not liquid.
In most cases, deferred annuities allow you to withdraw up to a specified percentage of the contract’s accumulated value each year during the withdrawal charge period without any charges. Once the withdrawal charge period has ended, funds may be withdrawn without any charges. Keep in mind that fixed indexed annuities are designed to meet your needs for long-term retirement savings and income.
5. Myth — Fixed indexed annuities are investments.
Fixed indexed annuities are insurance products that are designed to help you manage certain financial risks associated with retirement such as volatile markets, falling interest rates and longevity. They do not directly participate in any stock or equity investments.
It makes sense that people may be apprehensive to purchase something they may not fully understand. But, if you are looking for a way to supplement your retirement portfolio with a product that can help lead you toward the happy and secure retirement you dream of, contact your financial professional today. After a thorough discussion about the pros and cons of each option, you will be more prepared to make a confident and informed decision. You may just find out that a fixed indexed annuity is right for you!
Withdrawals and surrender may be subject to federal and state income tax and, except under certain circumstances, will be subject to an IRS penalty if taken prior to age 59½.
Guarantees provided by annuities are subject to the financial strength of the issuing insurance company. Guaranteed lifetime income is available through annuitization or the purchase of an optional income rider for a charge.
Fixed indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market Indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an Index nor any market-indexed annuity is comparable to a direct investment in the equity markets. Clients who purchase indexed annuities are not directly investing in a stock market index.
Under current tax law, the Internal Revenue Code already provides tax deferral to qualified money, so there is no additional tax benefit obtained by funding a qualified contract, such as an IRA, with an annuity; consider the other benefits provided by an annuity, such as lifetime income and a Death Benefit.
Any information regarding taxation contained herein is based on our understanding of current tax law. The tax and legislative information may be subject to change and different interpretations. We recommend that you seek professional legal advice for applicability to your personal situation.