Fixed Annuities
What Are Fixed Annuities?
Fixed annuities are insurance contracts that guarantee a specific interest rate payment to the buyer for contributing to their account for a specific period of time. This is in contrast to variable annuity, which pays an interest rate that fluctuates based on the stock market performance chosen by the account owner.
Insurance companies are the only type of financial organization that can issue fixed annuities. Although fixed annuities can be provided by banks, other financial organizations, and governments, they are not regulated by the federal government, unlike other investment products. Nevertheless, they are still one of the safest and lowest risk financial instruments used in retirement planning.
Fixed annuities can be immediate or deferred, depending on the type of contract you sign. If you choose immediate fixed annuities, you will start receiving payments within one year of purchasing the contract or at a later time. With deferred annuities, on the other hand, you will start receiving payments at retirement.
Before the 1970s, fixed annuities were almost always used as a vehicle for retirement income. Today, however, these annuities can offer you a whole lot of other benefits as well.
Main Fixed Annuity Benefits
- A means of accumulating tax-advantaged interest
- Premium protection for preserving and retaining estate assets
- Guaranteed income for life
- Low risk
- Allows safety and access to the principal
Tax Advantages
Annuities enables your investments to grow tax-free until the money is withdrawn. This includes capital gains, dividends, and interest, which can be reinvested as long as they remain in the annuity. This allows your investment to grow without the account owner having to pay taxes. This doesn’t mean that you will be able to avoid paying taxes completely; however, the taxes won’t come due until you start receiving payments. The Treasury Department will also charge a 10% penalty on interest along with regular taxes if you withdraw your funds before the age of 59 ½.
Most annuity contracts allow the buyer to benefit from deferred tax until age 85, 90, or even later. This is unlike qualified retirement accounts, where the owner is required to withdraw money around the age of 70.
