There’s a lot of information out there about fixed indexed annuities (FIAs), and it can be difficult to separate fact from marketing hype. The bottom line is that indexed annuities are a useful tool that can be a big help in preparing you for retirement. Here are a few of the benefits of indexed annuities, so that you can decide if they’re right for you.
Like all annuities, indexed annuity contracts offer tax deferral on your funds and the interest they earn. This means that you don’t have to pay taxes on the money until you actually withdraw it, much like a qualified retirement plan.
The main advantage of tax deferral is the opportunity to potentially pay taxes at a lower rate than you would if you simply took possession of the money now. By deferring until retirement, you can withdraw the funds when you are no longer working and hypothetically, in a lower income bracket. In theory this would allow you to ultimately keep more of your earnings for yourself and your family.
If you fund a contract with after-tax money, you will of course not have to pay taxes on that money again – only the interest earned will be subject to income tax. Deferral still applies, however, making an indexed annuity just as advantageous for this type of money.
Unlike many fixed financial products available, indexed annuities do not simply provide a static rate of interest. Instead, the amount of interest they earn is linked to a market index, such as the S&P 500 or the Nasdaq. Since it is still a fixed chassis, this upside will be limited to some degree, but carries the potential for a higher rate of interest than a comparable fixed-rate product.
Multiple Crediting Strategies
In addition to allowing you to enjoy some of the upside in the market, there are multiple strategies available to you, which can perform well in certain market environments. You can typically change these every year, which lets you change your approach based on the market outlook. Each annuity product has a unique set of strategies available – your financial professional can help you to choose the one that suits you best.
One of the defining features of an indexed annuity contract is the ability to shield your money from any downturns in the markets. While your interest earned will be affected, you can rest easy knowing that market changes will never cause you to lose any of your original premium or any of the interest you have already earned.
While safe accumulation is a strong feature common to all indexed annuities, many also carry a second powerful benefit: a guaranteed lifetime income. Many FIAs allow you to harness the value accumulated in your contract to produce a guaranteed income that cannot be outlived – even if it pays you back more than the total value of your annuity!
There are several ways to accomplish this, though it is most commonly done through the use of a rider – an additional feature added to your contract that may carry an annual fee. Not every product has an income rider, and like crediting strategies, each product is unique in how it works to create that income stream. Your advisor can walk you through the details of each, so that you can make the choice that’s right for you.
Now that you know the basic benefits that FIAs provide, you can evaluate your personal financial decision and determine if they can help you achieve your retirement goals. If you think they’re right for you, speak with your financial professional to learn more about how to begin funding one.
This information is provided as general information and is not intended to be specific financial guidance. The information and opinions expressed herein are from sources believed to be reliable; however, we make no representation as to its accuracy or completeness. Before you make any decisions regarding your personal financial situation, you should consult a financial, legal or tax professional to discuss your individual circumstances and objectives.
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Annuities are designed to meet long-term needs for retirement income. They provide guarantees of principal and credited interest, subject to surrender charges, and a death benefit for beneficiaries.