funding your future with a fixed annuity
DESCRIPTION
Find out how a fixed annuity can provide a persona pension for you and your family in retirement.TRANSCRIPT
Dolf Dunn Wealth Management, LLCDolf Dunn, CPA/PFS,CFP®,CPWA®,CDFA
Private Wealth Manager11330 Vanstory Drive
Suite 101Huntersville, NC 28078
Funding Your Future with a Fixed Annuity
September 03, 2013
A fixed annuity is a contract between you and anannuity issuer, usually an insurance company. In itssimplest form, you pay money to the annuity issuer;the issuer invests the funds and pays the principaland its earnings back to you or to your namedbeneficiary. What's fixed about a fixed annuity? Theissuer guarantees (subject to its claims-paying ability)a minimum rate of interest on your investment and afixed benefit amount if you elect to annuitize.
When is an annuity appropriate?Annuity contributions are made with after-tax dollarsand are not tax deductible. That's why it's oftenadvisable to fund other retirement plans first.However, if you've already contributed the maximumallowable amount to other plans and want to savemore toward your retirement, an annuity can be anexcellent choice. There's no limit to how much youcan invest in an annuity, and the funds grow taxdeferred until you begin taking distributions.
Once you begin withdrawing from your annuity, you'llpay taxes (at your regular income tax rate) only onthe earnings, since your contributions to principalwere made with after-tax dollars. Like a qualifiedretirement plan, a 10% tax penalty may be imposed ifyou withdraw from an annuity before age 59½.
Annuities are designed to be very-long-terminvestment vehicles. In most cases, if you take awithdrawal, including a lump-sum distribution of yourannuity funds within the first few years afterpurchasing your annuity, you may be subject tosurrender charges imposed by the issuer. However,many companies allow options for withdrawals ordistributions without incurring a charge. As long asyou're sure you won't need the money until at leastage 59½ and you understand the costs (includingfees) involved, an annuity is worth considering.
Two distinct phases to an annuityThere are two distinct phases to an annuity contract:the accumulation phase and the distribution phase.
In the accumulation phase, you're putting money into
the annuity. You can choose to pay your premiums inone lump sum, or you can make a series of paymentsover time. These payments can be of equal amountsmade at equal intervals, or of variable amounts atirregular intervals, depending on the terms of thecontract.
Annuities may be either immediate or deferred; theterms simply refer to when the distribution phasebegins. Immediate annuities are typically purchasedwith a single payment and the distribution phaseusually begins within a year of the purchase. Whiledeferred annuities may be purchased with a singlelump sum premium payment, they are most oftenpurchased with a series of periodic payments. Thedistribution period is deferred until some time in thefuture.
In the distribution phase, you begin taking money outof the annuity. You may withdraw some or all of themoney in lump sums, or you may annuitize. Subjectto the claims-paying ability of the issuer, annuitizationprovides a guaranteed income stream for either aspecified period or for life.
Why buy an annuity?• To provide income to supplement what you
receive from Social Security, pension plans,and other employer-sponsored retirementplans.
• To create a lifetime income stream.• To maintain financial independence. For
example, you can use annuity funds to pay forlong-term care expenses and stay in your ownhome, rather than rely on your children for care.
• To invest for any specific purpose or long-termgoal, such as providing a legacy for your heirsor making a charitable gift.
• To grow funds on a tax-deferred basis.
Page 1 of 2, see disclaimer on final page
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for anyindividual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performancereferenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with aqualified tax advisor.
Securities offered through LPL Financial, Member FINRA/SIPC
How a Fixed Deferred Annuity Works
1. In the accumulation phase, you (the annuityowner) send your premium payment(s) (all at onceor over time) to the annuity issuer. Thesepayments are made with after-tax funds, and youmay invest an unlimited amount.
2. The annuity issuer places your funds in its generalaccount.* Your annuity contract specifies how yourprincipal will be returned as well as what rate(s) ofinterest you'll earn during the accumulation phase.Your contract will also state what minimum interestrate applies.**
3. The compounding interest on your annuityaccumulates tax deferred. You won't be taxed onthese earnings until funds are withdrawn ordistributed.
4. The issuer may collect fees to manage yourannuity account. You may also have to pay theissuer a surrender fee if you withdraw money inthe early years of your annuity.
5. Your annuity contract may contain a guaranteed**
death benefit or other provisions for a payout uponthe death of the annuitant. (The annuitant providesthe measuring life used to determine the amount ofthe payments if the annuity is annuitized. As theannuity owner, you're most often also theannuitant, although you don't have to be.)
6. If you make a withdrawal from your deferredannuity before you reach age 59½, you'll not onlyhave to pay tax (at your ordinary income tax rate)on the earnings portion of the withdrawal, but youmay also have to pay a 10 percent prematuredistribution tax, unless an exception applies.
7. After age 59½, you may make withdrawals fromyour annuity without incurring any prematuredistribution tax. Since annuities have no minimumdistribution requirements, you don't have to makeany withdrawals. You can let the account grow taxdeferred for an indefinite period. However, yourannuity contract may specifiy an age at which youmust begin taking income payments.
8. To obtain a guaranteed** fixed income stream forlife or for a certain number of years, you couldannuitize which means exchanging the annuity'scash value for a series of periodic incomepayments. The amount of these payments willdepend on a number of factors including the cashvalue of your account at the time of annuitization,the age(s) and gender(s) of the annuitant(s), andthe payout option chosen. Usually, you can'tchange the payments once you've begun receivingthem.
9. You'll have to pay taxes (at your ordinary incometax rate) on the earnings portion of anywithdrawals or annuitization payments you receive.
* These funds are invested as part of the generalassets of the issuer and are therefore subject to theclaims of its creditors.
** All guarantees are subject to the claims-payingability of the issuing company.
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