Understanding
The Basics
Discover how annuities provide secure, tax-deferred income with options for principal protection and growth linked to market performance.
How Annuities Work: The Basics
An annuity is a contract with an insurance company that allows you to receive fixed payments over time. Annuities typically enable you to set yourself up to earn income for life.* Depending on the type of annuity, there are different risks involved. For instance, while some annuity products are at risk of losing money in the event of a stock market decline, others are not. In contrast to a variable annuity, which might lose money in the event of a stock market downturn, a fixed indexed annuity will not.* We can assist you in understanding how annuities work and selecting a product that offers both a reasonable rate of return** and protection of principal, because we consider safety to be a core value.
Fixed Indexed Annuity Basics
One advantage of a fixed indexed annuity is that it protects your money.* This is an important detail in regard to how annuities work: you contribute a set amount of money, and the issuing insurance company agrees to protect it and pay you an interest rate. Additionally, there is a predetermined payment schedule and a set term.
Your FIA is linked to an underlying index, meaning it can earn a higher** interest rate when the market is up. However, it does not directly invest in the market. When the market is up, you can expect a higher rate of return,** but when it is down, you will not suffer losses. According to the terms of the contract, the insurance company must protect your principal and interest. This makes an FIA, in our opinion, the best of both worlds.
How Annuities Work In Relation to Taxes
Annuities earn interest tax-deferred. This means you only have to begin taking payments when you withdraw your money. There may be other tax benefits to choosing an annuity, too. For example, if the following parameters apply to you:
- You have received a lump sum payment from a former employer's 401(K)
- This amount was included as part of an early retirement or severance package
- You are under the age of 59½
Usually, you would have to pay hefty taxes on that money.
However, you might be able to delay those taxes by “rolling over” the money into an annuity instead, if all of those things apply to you. Of course, when it comes to matters like this, you should always seek advice from a qualified tax advisor.
