An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments.
Annuities typically offer tax-deferred growth of earnings such as Index Funds with no risk, and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments or payments with growth.
While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates.
If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties or if your under age 59 1/2 which like a IRA, may incur a 10% penalty.
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HOW ANNUITIES COMPARE
Non-Qualified Annuities are taxed as ORDINARY INCOME, not as LONG-TERM Capital Gains. Which means that you could end up paying much more in tax then you may have expected. Non-Qualified is taxed differently then Ordinary income and this is important not to make this mistake if you have a choice of the types of funds to use for annuities. For more information, speak to your tax advisor.
Fixed Annuities offer a Guaranteed or Flexible rate for a term that has been chosen. Most common is a 5 year guaranteed rate that ranges from 2.5 to 4% depending upon the marketplace environment at time of purchase. These are often used to grow money safely and with a rate that is many times higher then a bank CD.
Single Premium Immediate Annuities requires a lump sum of premium in exchange for a lifetime income based upon life expectancy. In most cases there is a PERIOD CERTAIN option that continues to pay a beneficiary should you not outlive the specified period selected. Income starts immediately and your access to premium paid is gone.
ANNUITY INCOME RIDERS
This is an option that may be included onto a Variable or Fixed Index Annuity that allows you to receive a lifetime income based upon your life expectancy while having access to your cash value within the policy. The cost for this type of rider is around 1% depending upon the carrier. There are many more details about how these work and we ask that you read the documents offered by the carriers prior to making a decision to purchase an income rider. Learn More...
Index Annuities Offers Safe Growth
EDUCATIONAL ONLY (Some information will be different with each insurance company)
Annuity contracts typically require money be left in the annuity for a specified period of time, usually referred to as the “surrender charge period”. If you fully surrender your annuity contract at any time, guaranteed payments provided for in the contract and any rider will typically be in force, and you will receive your contract’s cash surrender value. The annual reset allows for any interest credited on each contract anniversary to be “locked-in” and it cannot be taken away due to market decreases. The interest credited is added to the accumulation value of your contract, which then becomes the guaranteed accumulation “floor” that will be included in the calculation of the interest that is credited going forward, subject to any withdrawals and applicable rider fees. The annual reset sets the index starting point each year at the contract anniversary. This reset feature is beneficial when the index experiences a severe downturn during any given year because not only do you not lose accumulation value from the downturn, but the new starting point for future growth calculations is on the lower index value. Although an external index may affect your interest credited, the contract does not directly participate in any equity investments. You are not buying shares of an index. The index value does not include the dividends paid on the equity investments underlying any equity index. These dividends are not reflected in the interest credited to your contract. Early withdrawal charges will apply if money is withdrawn during the early withdraw charge period. The S&P 500® is a trademark of Standard & Poor’s Financial Services, LLC and its affiliates. Birdseye Financial is not affiliated with, nor does it have direct business relationship with Standard & Poor’s Financial Services, LLC. Not FDIC Insured | May lose value | No bank or credit union guarantees | Not a deposit | Not insured by any federal government agency or NCUA/NCUSIF