Got Questions? Just Ask Mark
Click Here
Call - (214) 762-2327

"Your Money Matters"

What is an annuity?

Bookmark and Share

In its most general sense, an annuity is an agreement for one person or organization to pay another a stream or series of payments. Usually the term “annuity” relates to a contract between you and a life insurance company, but a charity or a trust can take the place of the insurance company.

There are many categories of annuities. They can be classified by:

  • Nature of the underlying investment – fixed or variable
  • Primary purpose – accumulation or pay-out (deferred or immediate)
  • Nature of pay-out commitment – fixed period, fixed amount, or lifetime
  • Tax status – qualified or nonqualified
  • Premium payment arrangement – single premium or flexible premium

An annuity can be classified in several of these categories at once. For example, you might buy a nonqualified single premium deferred variable annuity. For brief definitions of these categories, click here.

In general, annuities have the following attractive features:

Tax deferral on investment earnings

Many investments are taxed year by year, but the investment earnings—capital gains and investment income—in annuities aren’t taxable until you withdraw money. This tax deferral is also true of 401(k)s and IRAs; however, unlike these products, there are no limits on the amount you can put into an annuity. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs.

Protection from creditors

If you own an immediate annuity (that is, you are receiving money from an insurance company), generally the most that creditors can access is the payments as they’re made, since the money you gave the insurance company now belongs to the company. Some state statutes and court decisions also protect some or all of the payments from those annuities. And your money in tax-favored retirement plans, such as IRAs and 401(k)s, are generally protected, whether invested in an annuity or not.

An array of investment options, including “floors”

Many annuity companies offer a variety of investment options. You can invest in a fixed annuity which would credit a specified interest rate, similar to a bank Certificate of Deposit (CD). If you buy a variable annuity, your money can be invested in stock or bond (or other) mutual funds. In recent years, annuity companies have created various types of “floors” that limit the extent of investment decline from an increasing reference point. For example, the annuity may offer a feature that guarantees your investment will never fall below its value on its most recent policy anniversary.

Tax-free transfers among investment options

In contrast to mutual funds and other investments made with “after-tax money,” with annuities there are no tax consequences if you change how your funds are invested. This can be particularly valuable if you are using a strategy called “rebalancing,” which is recommended by many financial advisors. Under rebalancing, you shift your investments periodically to return them to the proportions that you determine represent the risk/return combination most appropriate for your situation.

Lifetime income

A lifetime immediate annuity converts an investment into a stream of payments that last as long as you do. In concept, the payments come from three “pockets”: Your investment, investment earnings and money from a pool of people in your group who do not live as long as actuarial tables forecast. It’s the pooling that’s unique to annuities, and it’s what enables annuity companies to be able to guarantee you a lifetime income.

Benefits to your heirs

There is a common misconception about annuities that goes like this: if you start an immediate lifetime annuity and die soon after that, the insurance company keeps all of your investment in the annuity. That can happen, but it doesn’t have to. To prevent it, buy a “guaranteed period” with the immediate annuity. A guaranteed period commits the insurance company to continue payments after you die to one or more beneficiaries you designate; the payments continue to the end of the stated guaranteed period—usually 10 or 20 years (measured from when you started receiving the annuity payments). Moreover, annuity benefits that pass to beneficiaries don’t go through probate and aren’t governed by your will.

Contact Mr. Mark Gardner today at 214-762-2327 or email him at MarkGardner@RetireWellDallas.com to further discuss your personal issues and needs.

Related


 Helping families with retirement & pre-retirement planning while maximizing your social security benefits: Annuities, Wealth Management & Life/Disability/Long Term Care Insurance.

Latest Blog Posts

Local RetireWellDallas, Mark S. Gardner, Owner Completes Advanced Training from America’s IRA Experts at Ed Slott and Company, LLC Members of Ed Slott’s Elite IRA Advisor GroupSM Studied Latest Retirement Account Planning Strategies, Estate Planning Techn[...] Read More >>

Local RetireWellDallas, Mark S. Gardner, Owner Completes Advanced Training from America’s IRA Experts at Ed Slott and Company, LLC Members of Ed Slott’s Elite IRA Advisor GroupSM Studied Latest Retirement Account Planning Strategies, Estate Planning Techn[...] Read More >>


Using Your IRA for a Short-Term Loan Reported By Mark S. Gardner, 214-762-2327 For many Americans, their IRA is their largest asset. It is not surprising then that in times of financial trouble they may want to turn to their IRA as a quick source of cash.[...] Read More >>

Using Your IRA for a Short-Term Loan Reported By Mark S. Gardner, 214-762-2327 For many Americans, their IRA is their largest asset. It is not surprising then that in times of financial trouble they may want to turn to their IRA as a quick source of cash.[...] Read More >>


About Mark S Gardner

Mark S Gardner,
Managing Partner,
RetireWellDallas
International Plaza III
14241 Dallas Parkway, Suite 650
Dallas, TX 75254
Main: 214 775-1760
Mobile: 214-762-2327
Fax: 469-914-6088
Email:MarkGardner@RetireWellDallas.com
Website: www.RetireWellDallas.com


Mark Gardner on Willie Lambright Radio Show