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   Retirement Planning

What is an Annuity?

An annuity is a contract between you and an insurance company.  You as an annuitant agree to pay the insurance company a single payment, or a series of payments, and the insurance company agrees to pay you an income, starting immediately (an immediate annuity) or at a later date (a deferred annuity), for a specified time period.  Under current law, the monies put into an annuity grow on a tax-deferred basis.  That benefit is critical to your retirement.  


Advantages of Annuities


Annuities can be smart investments for people of all ages.  Many people enjoy the advantages of annuities when:

  • An alternative is desired to Certificates of Deposit and Money Market Funds.  The interest paid on Certificates of Deposit and Money Market Funds may be too low, and the earnings may be treated as taxable income each year
  • A tax-deferred growth of earnings is desired on a long-term basis
  • Much greater savings are desired for retirement, but IRAs, 401(k)s, and 403(b) plans have been maxed out.  Annuities can offer the potential for unlimited contributions on a non-qualified (non-deductible) basis
  • Existing pension/retirement plans must be rolled over (reinvested) through changes of employment or termination.  While annuities provide the same tax deferral nature of qualified retirement plans as other investment vehicles, they can offer stronger guarantees to meet individual needs
  • An income is desired that you can’t outlive – one that is guaranteed for the rest of your life, or for the life of both the annuitant and spouse
  • A plan is desired where no probate is required at death (as long as you specify the beneficiaries)

Tax Deferral


Your annuity achieves a triple compounding of earnings until you decide to receive the monies in payments.  The deferral of taxes until you actually receive the monies generates huge potential for much greater income at retirement - your principal earns money, the earnings from your principal’s return earns money, and the monies you would have paid in taxes (but didn’t pay in taxes due to the deferral process) earns money.  Deferring income taxes until a later date gives your investment room to work harder for you.  Tax deferral also gives you more control for timing the income, and the taxable benefit, to a point where you may find yourself in a lower tax bracket (e.g, at retirement), than when the money was first invested.


An Exciting New Kind of Annuity – Equity Linked Index Annuity


An equity linked index annuity is a special type of contract between the annuitant and the insurance company.  When you make a contribution into the program (e.g., a lump sum payment or a series of payments), the insurance company credits a return based on the change in an equity index, such as the S&P Composite Stock Price Index.  Some common features used to compute the interest rate credited to the program include the participation rate, the type of structure (e.g., annual reset and point-to-point calculations), and margin or spread that may be assigned to the contract.


Equity linked index annuities combine the safety of a standard fixed annuity with returns linked to an investment (equity) index (such as the S&P 500 Composite Stock Price Index noted above).  These programs can have a minimum guaranteed interest rate for the life of the annuity contract, a guaranteed minimum participation rate, and a guaranteed retention of gains achieved each time a calculation is completed at reset (ability to go up, but never down, due to market risk – if the market goes down for the year, the next year begins at the same level as the ending of the prior year).    


Receiving Income – Annuitization


Many annuity contracts permit withdrawals.  When you withdraw money, you may have certain benefits, but you may also be subject to certain taxes, surrender charges, and penalties (see specific contracts for details). 


When you elect to take monthly payments, you annuitize your contract (a process called annuitization).  You have a number of options that can be custom designed to meet your specific needs.  This monthly income can be structured to be guaranteed for a defined number of years, or to be guaranteed for the rest of your life (an income that you can’t outlive).  The payout can be designed to guarantee benefits for the individual annuitant alone, or for the individual and spouse. 


Taxation - Annuity Payouts


Annuity payouts can provide tax deferral as well.  Only the interest portion of the payout is considered taxable income – the balance is considered a return of your principal (and received tax free).  Taxes on the earnings of the annuitized payment are spread over the entire payout period – meaning you can pay less money taxes in your retirement years (vs. a lump sum payment). 


The income received from an annuity payout is taxed as ordinary income rather than as capital gains.  If you withdraw money prior to age 59-1/2, you may be subject to a Federal tax penalty of 10% of the accrued earnings received.


There are a number of factors required to secure a quote for a fixed annuity.  For a free quote, or if you have any questions, please send us an e-mail at mgold@goldfinancialgrp.com, or give us a call us at 703-753-3314 (toll free at 1-800-571-2980), and we will be happy to respond accordingly.  


The information for the quotation you are requesting should be completed as thoroughly and accurately as possible. Once submitted, we will expedite your request accordingly - we look forward to serving you!


The personal information provided will be kept strictly confidential, and will be used for quotation purposes only. The material presented above should be used for informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources thought to be reliable, individual positions can vary and the respective professional advisors should be consulted as necessary.

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