A fixed annuity is a contract with an insurance company and most closely resembles a bank certificate of deposit. Fixed annuities can offer tax-deferred growth or regular monthly interest payments.
Some fixed annuities use a floating interest rate that can change each year while most others use a fixed rate that is declared at onset. An example of a fixed rate multi-year annuity (MYGA) would be a 5 year account that credits 3% interest for all five years – no more no less. After the 5 year term, you can reinvest in another annuity, withdraw all funds, or in some cases continue the policy surrender free at the declared rate.
By purchasing a fixed rate multi-year annuity when rates are high, you have the ability to lock in better returns for your time horizon.
Conversely, when interest rates are low, and may be rising, purchasing a floating rate or short term annuity can be more beneficial. We offer a wide array of fixed annuities depending on your needs and goals. The most common maturity terms are between 2 and 10 years.
Fixed annuities are a stable and safe alternative to certificates of deposit, interest-bearing government bonds, corporate bonds, municipal bonds, as well as other stock and bond market instruments.
Annuity policies are growing in popularity as they offer tax-deferred growth, safety, flexibility, monthly interest payments, and/or lifetime income options. Compare to CD’s at the bank, many fixed annuities are offering better returns – especially over a 5 year term.
You might benefit from an annuity policy for many reasons. In some cases, tax-deferred growth is needed. You can defer income taxes for your entire lifetime in a non-qualified account. And annuities allow you to defer income gains by taking advantage of a 1035 tax-free exchange.
Annuities are also a popular vehicle to save for retirement. You can make systematic contributions to a qualified or non-qualified retirement annuity in your working years. The principal and interest grow tax-deferred and your gains compound until retirement is reached. At that time, you can systematically withdraw the interest and/or principal in order to create steady income.
Tax sheltered annuity 403(b) accounts are widespread among those working in the public sector. Most have fixed, indexed and variable options to choose from. Upon separating from employment, it is common for account owners to consider rollover options.
At retirement, 403(b) accounts can be rolled over into an IRA or other qualified annuity contract. This tax-free process can allow the owner to establish an investment more suited to their individual risk preferences. Fixed and indexed annuities are popular as they have no direct exposure to the market and cannot lose value.
Another approach is to fund a non-qualified annuity with after-tax dollars. Contributions are not tax deductible like a qualified plan, but the investment grows tax deferred until income is needed.
Non-qualified annuities can be subject to IRS penalties if withdrawals are taken before age 59 ½. Certain hardship provisions or a lifetime annuitization can avoid these penalties, however. And there are no Required Minimum Distributions to worry about with non-qualified accounts.
Fixed and indexed annuities are popular as they can provide a lifetime income stream. Upon retirement or during another time of need, you can systematically withdraw principal and interest over a set number of years – or for a lifetime. This strategy is referred to as an annuitization and is popular for those needing reliable, systematic income.
There are a number of ways to setup these types of accounts. Immediate annuities begin payments right away. Deferred income accounts will activate after a predetermined number of months or years. Other fixed and indexed accounts have optional income riders that provide flexibility as to when and how the income is withdrawn. Still others offer increasing income each year once the payments begin.