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HOW ANNUITIES WORK

If you choose the right type of annuity, it may be an important part of your retirement strategy. Let’s review how annuities work. First, the basic definition of an annuity is that someone receives payments, usually monthly or yearly. But when we talk about an annuity, we are referring to a product that insurance companies may provide. Money gets put into the annuity and the insurance company agrees to keep the principal balance safe. The rules for annuities differ from the rules for investments or other retirement accounts.

An annuity is a contract. The terms of your annuity are in this contract and may include information that is important for its impact on your money. For example, your annuity, particularly if it is a fixed index annuity (FIA) or a fixed annuity (FA), may provide a reasonable rate of return.* However, these agreements also present the owner with protection from market losses. The bottom line is: the principal has protection.

The Insurance Companies And How Annuities Work

An FIA has the benefit of keeping its principal value intact, even if the market goes down. In fact, the insurance companies that provide these policies must keep a reserve fund in order to protect your money. Depending upon the terms of your FIA, the insurance company may agree to provide a certain earnings rate. However, this links to an index, not the market itself. Also, you can receive income payments from your FIA every month or each year. Your assets have protection and your retirement income is safe. Because of this combination of a potential reasonable rate of return as well as safety, and FIA is definitely worth looking into. Many retirees can benefit from a product like this that helps keep some of their money safe from the market’s ups and downs.

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Fixed Index Annuity Phases

An FIA has 2 stages: accumulation and then a distribution phase. Basically, during the first stage, you leave your money in the annuity and allow it time to mature. Once you buy an annuity, you enter this phase. However, you can begin taking money out of an annuity once you hit the second phase. This is also known as the withdrawal phase. The amount you can take out and when it can be taken will vary per annuity contract. So, be sure to consult with an advisor who can help you understand the FIA terms and conditions.

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Stage 1: Accumulation

Each FIA product may offer different stipulations as to if and when potential growth may happen. Also, fixed annuities (not the same as FIAs) have a different way of handling this stage. For those products, you get a set rate of return, no matter what happens in the market. You may not gain in an upside of an index, however, you still receive the same rate even when the market is down. On the other hand, a variable annuity has more chance of losing since it changes when the market does. Basically, the first phase is the waiting timeframe before you can take money out of your annuity.

Stage 2: Taking Money Out

Once the annuity is mature, you may begin to take money out. Of course, you’ll need to stick to the terms of your agreement. For sure, an FIA is a good option for retirees who want to take a monthly or annual income payment. You must, of course, pay any taxes that apply. But, the tax liability will differ from person to person. If you have specific questions, reach out to us. We’ll help connect you with the answers you need. FIAs can give you a lifetime income without the worry of losing your principal if the market drops.

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Annuities and Taxes

Taxes are part of how annuities work, too. During stage 1, you do not have to pay taxes right now. Instead, you pay taxes on any money you take. Unlike a savings account, CD (certificate of deposit), or money market account an FIA can grow tax-free. For those looking for new options in regard to taxes, this information may be useful.

Your age and situation may impact taxes on retirement as well. For example, those who rollover an early retirement lump sum profit-sharing plan into an FIA may see benefits. Because FIAs hold off on taxes, this roll-over strategy may be valuable for some retirees. Not all early retirements can access these benefits. So, always talk with a professional before moving your retirement money.

How do FIAs work in an overall retirement strategy? Call us today for a meeting and no pressure chat.

*Reasonable rate of return over time.

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