Annuities are contracts that provide a guaranteed income stream and tax deferral advantages during retirement.  

Annuities are long term contracts with insurance companies in which you a provide lumpsum payment in exchange for future income in the form of regular disbursements. Unlike in the case of required minimum distributions from IRA accounts, some annuities allow the buyer to choose when payments start to be disbursed, and provide options on the duration of the payment period. Such flexible payout options can help retirees customize their cash-flow needs to guarantee a lifetime income stream backed by the claims-paying ability of the issuing insurer.

Another core feature of annuities is their tax-deferral features. Buyers of annuity contracts pay taxes only upon withdrawal, at which point the withdrawals are taxed at the ordinary income rate. Notably, unlike other tax-deferral accounts such as 401(k)s and IRAs, there are no annual contribution limits for an annuity. This allows large sums of money to be sheltered from taxes for long periods of time.

Many annuities also offer a death benefit. Generally, if the contract owner or annuitant dies before the annuitization (disbursement) stage, the beneficiary will receive a death benefit at least equal to the net premiums paid. In this manner, annuities can help an estate avoid probate, as beneficiaries receive the annuity proceeds without time delays and probate expenses.

Annuities often come with contract limitations, significant administrative fees, and surrender charges, and may be subject to an additional 10% federal income tax penalty if distributions are taken prior to reaching age 59 1/2. Because of these caveats, it is important that you consult a financial advisor to evaluate whether or not annuities are suitable for your financial strategy.

Types of Annuities

Fixed Annuities

Fixed annuities pay a fixed rate of return that can start right away (with an immediate fixed annuity) or can be postponed to a future date (with a deferred fixed annuity). Although the rate on a fixed annuity may be adjusted, it will never fall below a guaranteed minimum rate specified in the annuity contract. This provides predictable investment returns and guaranteed minimum rates, at the cost of potential portfolio growth.

Variable Annuities 

Variable annuities are contracts in which the value is contingent on the performance of underlying mutual funds selected by the annuity owner. Like fixed annuities, variable annuities are offer either immediate income or deferred income. While variable annuities offer the potential for higher growth, they also come with potential declines on the underlying mutual funds.

Indexed Annuities 

Indexed annuities are similar to variable annuities in that their interest rate is contingent on the performance of other securities. However, instead of mutual funds, these annuities pay interest rates based on the performance of a specified market index such as the S&P 500.

Should an annuity be part of your retirement strategy? Call 631.393.2888 now to schedule a complimentary consultation to review your retirement planning strategies and discuss whether annuities have a place in your financial plan.