Annuities and Investments


An Annuity is a taxed deferred retirement savings vehicle. Only insurance companies sell these products. Annuities consist of two stages: the accummulation stage and the distribution stage. Annuities are corporate obligations of an insurance company and as such, the policy owner is guaranteed a return of principal and interest as long as the annuity is held for an agreed upon period of time, usually between 2 to 10 years. Only insurance companies have the financial strength and cash reserves to offer the guarantees found in annuities. Mandated reserve requirements mean that when a tax deferred annuity is purchased, the insurance company by law, must set aside dollar for dollar reserves to cover all anticipated payouts. Annuities are purchased primarily for the guarantees of tax deferred growth, return of principle and a means of securing a guaranteed steady cash flow of income as long as they live.

-Immediate Annuity Policy

Immediate annuities are single premium deposits or rollovers from IRA, 401K, 403B, or CD's etc. When retirees are looking to immediately recieve a guaranteed stream of income for life or maybe just a specific number of years. The insurance company calculates the amount of each income payment based on your purchase amount and interest parameters the annuitant chooses as well as their current age.

-Fixed Interest Annuity Policy

Fixed annuities are regulated by state insurance departments and sold through insurance agents, banks, or registered representatives. Fixed annuities pursuant to state insurance law must provide a minimum rate of interest as provided in the annuity policy. How the actual rate of interest is credited on the policy differentiates traditional fixed annuities from indexed annuities. Traditional fixed annuities pay interest on the premium contributed at a rate declared by the insurer in advance. Some traditional fixed annuities offer multiple years guaranteed at the same rate, while others will leave the insurance company with the ability to adjust the rate annually. This rate can never be less than the minimum guaranteed rate stated in the policy. Fixed annuities are a very conservative safe money place for retirement dollars. Fixed annuity interest rates are generated from a portfolio of US treasuries or other low risk, fixed income instruments.

-Indexed Annuity Policy

Indexed annuities are a type of fixed annuity which are regulated and distributed in the same manner as fixed annuities (through licensed insurance agents). Indexed annuities are a conservative safe money place for retirement dollars. Indexed annuities usually provide a purchaser with various options for interest crediting. A buyer does have an option to elect a declared interest rate, which generally allows an allocation of anywhere from 0-100% of the account value, and functions the same as a traditional fixed annuity. However, the annuity is designed for higher potential interest rates, and provides other allocation options which consider the performance of an outside stock index (such as the Standard and Poor's 500, a.k.a. S&P 500) to determine the rate of interest. These options pay interest at a rate determined by a formula which considers any increase in the outside index, often subject to a "participation rate", and/or "cap, and/or "spread". All indexed annuities have a floor of zero, meaning the absolute worst case scenario due to a downturn in the market index is a consumer might receive no interest in a particular year, however, he or she cannot lose any previously credited interest or premiums. A "participation rate" is a set percentage multiplied by any percentage increase in the outside index. Unless guaranteed in the policy, the insurance company has the ability to adjust them on an annual basis. Participation rates, caps and spreads are known as "moving parts". Most annuities being issued today have only one moving part in determining an index calculation (i.e. only a cap or only a participation rate), however, it is possible to have multiple moving parts in determining an index calculation (i.e. a cap combined with a participation rate). An annuity with multiple moving parts is not necessarily better or worse than an annuity with only one moving part, and there is no way of determining in advance of a policy year whether a participation rate, cap and/or spread will yield the best performance.

-Qualified Plans

-Traditional IRA - contributions are often tax-deductible (often simplified as "money is deposited before tax" or "contributions are made with pre-tax assets"), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted). Depending upon the nature of the contribution, a traditional IRA may be referred to as a "deductible IRA" or a "non-deductible IRA." It was introduced with the Employee Retirement Income Security Act of 1974 (ERISA) and made popular with the Economic Recovery Tax Act of 1981.

-Roth IRA - contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free. Named for Senator William V. Roth, Jr., the Roth IRA was introduced as part of the Taxpayer Relief Act of 1997.

-SEP IRA - a provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee's name, instead of to a pension fund in the company's name.

-Non-Qualified Plans

Funding for a non-qualifies immediate annuity typically comes from the rollover of a single premium (one-time payment). Since that money has already been taxed, the only portion of the policy that is eligible for taxation is the wealth accumulation on it. Therefore, this option makes the most sense for a recent retiree who is looking to immediately take income on their policy.