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Should you Own or Buy a Fixed Annuity

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Can a fixed annuity help you as you begin or approach retirement?

As retirement looms close or begins, you may want to take advantage of what a fixed annuity can offer you. Here are some characteristics of fixed annuities that you might find useful.

A fixed annuity is a tax-deferred investment contract. The tax on the growth of your investment is deferred until you take money. If you funded your fixed annuity with after tax dollars, that portion of any payment you get is a return of principal and is tax free. You can use the fixed annuity calculator to project your future value.

You put money into a fixed annuity either by a series of payments you make to it or by making (purchasing) a fixed annuity with one lump sum amount. That money will grow tax deferred. Nonqualified fixed annuities (i.e. not set up with a business under qualified IRS plans) are funded with only ‘after tax’ dollars – unlike many qualified plans. But you can put as much as you’d like into them at anytime.

And what are the options for taking you money out of your fixed annuity? Your payout options are based on the claims-paying ability of the annuity issuer, but typical options are:

  • You surrender your annuity and receive a lump-sum of all the money.
  • You receive payments from the annuity over a specific number of years. If you die before this 'period certain' is up, your beneficiary will receive the remaining payments.
  • You receive payments from the annuity for your entire lifetime –as long as you live. But there will typically be no survivor payments after you die.
  • A combination of the above two.
  • You elect a joint and survivor annuity so that payments last for the combined life of you and your spouse. When one of you dies, the survivor receives payment for the rest of his or her life.

So what may be helpful for someone approaching or beginning retirement?

A fixed annuity gives you a place to put your money in a tax-deferred situation. And it’s free from claims of your creditors in some states. You can make one or a few large payments into it, if you’ve maxed out contributions to qualified plans and still want to shelter more money. If you die before taking any money out, the accumulated value will pass to your beneficiary directly, bypassing probate.

Take your money out when you need it –earlier or later. You can take it out right away as an immediate fixed annuity. This gives a guaranteed series of payments for life - if you choose - to assure you of a dependable and ongoing income. Or defer this payout as long as you wish with a deferred fixed annuity until you need it.

Note that the purchase of annuities will incur fees, commissions and potentially surrender charges. Withdrawals prior to age 59 1/2 are subject to 10% penalty. Guarantees are subject to the claims paying ability of the insurance company. Income received from fixed annuities is taxed as ordinary income.

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