Tax Deferred Annuities

So you’ve decided to stop stuffing money under your mattress (or the bank account equivalent of putting it in a savings account with 0.000001% interest).

Congratulations! Before you lose your motivation, let’s explore why a tax deferred annuity could be an ideal option for those funds.

Although annuities are often associated with retirement income, you do not have to be on your way to your sunset years to purchase these products. Instead, read on to decide what’s the best investment for your needs. We promise this will make cents!

Just the Tax Facts

First up, you may have heard of tax-deferred annuities called by another name: “fixed tax deferred annuity.” For sake of brevity, we’re going to lop off the “fixed.”

One of the first things you need to know about this investment strategy is that it is a contract. You are entering into a commitment to yourself and your insurance company. (So choose wisely!)

Second, this type of annuity may or may not guarantee income.

Wait! Don’t rush off and quit your job just yet.

There are, indeed, benefits:

• Annuities are, as their name says, tax-deferred. Other investment strategies such as certificates of deposit are not. This benefit leads to compounding interest!
• Income stream, guaranteed for life if you choose this option.
• Safety, in that the annuity is backed and sold only by qualified life insurance companies that hold reserves equal to the withdrawal value of your policy.

There are also, oh yes, drawbacks:

The biggest drawback of tax-deferred annuities is for those people who are just commitment-prone. You may think an annuity is the hottest thing on the planet, but what happens when you change your mind?

Fees and surrender chargers. That’s what happens. Penalties can be huge for early withdrawal on annuities, so just don’t do it. Once you commit, do not quit. Please remember NEVER EVER buy a product that is longer then 9 years. Most should be 6-7-8 years in term before it’s out of surrender.

Tax Deferred Annuity for You and Me

OK, maybe you’re not ready to purchase that annuity just yet, but your neighbors, friends, coworkers, and business owners all are.

The Insurance Information Institute studied insurance product purchases from 2006-2015 and saw an upswing in deferred annuity asset purchases. In 2015, the last year of their study, consumers bought:

• $1,922 billion in variable annuities
• $448 billion in fixed annuities
• $334 billion in indexed annuities

Although 2013 was the highest for annuity purchases in the time frame studied, the three most recent years (2013, 2014, and 2015) soared over all of the other years in the timeframe.

So who are these buyers pushing up the numbers?

It’s not who you think.

It may seem like only the rich can afford to purchase insurance products that will make them richer. But really, 70% of annuity buyers have household incomes under $100K.

And if you think tax deferred annuity buyers are only a certain age, think again. Please remember most insurance carriers only allow you to buy income rider annuities after the age of 50. But if you are looking for safety and tax differed growth you can purchase these at any age. Please remember there are IRS penalties if you take the money our before 59.5 but we can show you have to push this back and not be taxes, through a 1035 exchange.

In 2015, USA Today reported that millennials were snapping up annuities. This actually makes sense, because annuities really do benefit you in the long-term. Millennials have a long way to go before they’re able to tap into their retirement plans, so they’re thinking future-forward and putting money away for decades down the line.

It’s Guaranteed: Death and Taxes

Ah yes, the old cliche, that you can only count on two things in life: death and taxes.

Well, interestingly enough, the two commingle pretty well when it comes to tax-deferred annuities.

It sounds a bit like something out of the Marvel universe, but you should ask your annuity pro (your financial advisor) about the Death Benefit Rider.

Not all insurance companies offer this. And of course, the riders vary by company, so you really do need to ask for clarification.

There are two basic kinds of death benefit rider annuities:

• Guaranteed payout of the initial amount (lump sum) invested, with – of course – reductions for any withdrawals you may have taken out; or
• Guaranteed payout of the highest recorded value of the contract.
• Guaranteed payout with rising income.

The Sky (and Your Age) is the Limit

Like other retirement investments, tax-deferred annuities have their own set of rules and regulations.

• Contributions come from pre-tax income, when you buy them inside of your IRA’s / qualified accounts.
• You can start withdrawing after age 59 and a half but remember taxes come our first on any growth you have had.
• You can contribute as much as you want to your tax deferred annuity. Most start at 10,000 or 25,000 and require approval for over 1,000,000

The exceptions and fine print can really make your head spin, such as lifetime limits, income amounts and crediting options (how you make money in the annuity).

Basically, there are options, but do not hesitate to wave your hand and ask for help!

Important note: The government, insurance agency representatives and the Securities Exchange Commission are always coming together to refine these rulings. It is best to talk to your investment professionals to ensure you’ve got the latest and greatest details.

What to Do with an Annuity

Aside from, of course, enjoying the benefits of your good long-term planning investment!

And no, we aren’t advising to withdraw it all and hit the horse races.

You should know that you do have the option to withdraw your entire investment as a lump sum once the investment period expires or most index annuities will allow you to withdrawal 10% per year.

You can also roll the money from the expiring tax deferred annuity over (similar to how you would do if you have a certificate of deposit that is expiring) and pay zero taxes on that transaction. This transaction is called a 1035 exchange. We can help walk you through this process.

Be warned! Shady advisors hide this option from clients to make another commission. Do not fall for this, get a second opinion.

Let’s Talk

We’d love to hear if you fall into the 70% of annuity buyers in the income range studied. Have tax-deferred annuities helped you planning out your future?

Already have an investment strategy? That’s OK. How about a free review and comparison of where you may be better placed with your funds? It’s just too easy to get ripped off these days.

We want you to be informed, make good choices, and be excited about your future. The best way we’ve seen to do this is to educate, educate, educate. Once you purchase the wrong tax deferred annuity or put too much money into an annuity that is not tailored to your needs, it can be hard to come back.

Whether you’re feeling risk-tolerant or risk averse, let’s talk tax annuities together.

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