Tutorial on fixed annuity
A fixed annuity is a tax-deferred investment instrument. The tax on the appreciation of your investment is delayed until you receive money. If you fund your fixed annuity with after tax dollars, that section of any payment you obtain is a return of principal amount and is tax free. You can make use of the fixed annuity calculator to project your future value.
You can invest money into a fixed annuity either by a succession of payments or by buying a fixed annuity with one lump sum amount. Tax deferral growth will continue with the monies in this investment, as well as compound interest. A source of funds that is used to set up the annuity contract, but which are financed with only ‘after tax’ dollars are referred to as non-qualified fixed annuities. It is in contrast to qualified plans. You may invest as much of an amount as you would like into them at anytime.
The purchase of fixed annuities will entail fees, commissions and potentially surrender charges. 10% penalty is charged if the withdrawal is done before 59 and ½ years of age. The Life insurance companies guarantees are subject to the claims paying capability of the company. Income obtained from fixed annuities is taxed as ordinary income.
There are various options for taking your money out of your fixed annuity. Your payment options are dependent on the claims-paying capability of the annuity issuer. The general options are:
You can obtain payments from the fixed annuity for a specified number of years. If you expire before this maturity period is up, your beneficiary will get the remaining payments.
You can surrender your fixed annuity and get a lump-sum of all the money.
You can also obtain payments from the annuity for your lifetime. But typically there will be no survivor payments after you expire.
You can also choose a joint and survivor annuity so that payments last for the combined life of you and your partner. When one of you expires, the survivor gets the payment for the rest of his or her life.
As retirement appears near or starts, you may prefer to take advantage of the benefits of a fixed annuity. A fixed annuity gives you an option to invest your money and allows it to grow tax deferred. In some states it is free from claims of your creditors. You may decide to establish it with a single payment or a series of payments into it. This type of payment can be made even if you have contributed the maximum to qualified plans and still desire to shelter more money. If you pass away before receiving any money out of fixed annuity, the accrued value will bypass to your beneficiary directly.
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