Fixed annuities are similar to CD’s but offer a lot more benefits to most people. If you’re young, a fixed annuity may not be the right savings vehicle for your situation, however. The reason is also one of the benefits. All annuities offer a tax-deferred growth because the government considers them retirement vehicles. However, if you need the money before you’re 59 you may find yourself in a dilemma.
That might sound a little odd, but it just the nature of tax deferred products and plans. The fixed annuity is a retirement product, just like an IRA or 401K. Like any retirement product, if you remove money before you’re 59 , you pay a 10 percent penalty. In the case of the annuity, it’s on the interest only. Younger people shouldn’t put all their money into retirement vehicles because of the tax laws and penalties.
If, however, you’re close to 59 or past it, you’ll find that the tax-deferred growth is to your advantage. While you’re earning higher income and in a higher tax base, you grow the funds tax-deferred. Once you retire and your income drops, you can withdraw the funds your fixed annuity. While the growth is still taxable, you pay the taxes at a lower rate.
There is a federal taxation law for fixed annuities called LIFO. That is the short way of saying last in, first out. It means that the interest is the first thing you remove from the annuity, so if you have a substantial amount of interest in the product, you may end up paying just as much. You can avoid that problem, however, by stretching your payments over several years or taking annuity payments, which receive different tax-treatment.
Depending on the financial advisor you select, you’ll hear mixed messages on the use of a fixed annuity to fund an IRA or 401K rollover. The reason is the duplication of tax-deferral. While the purchase of an annuity because of it’s tax-deferred basis alone would make a foolish selection, if the interest rate is higher than other fixed instruments, then it is a logical candidate to fund a tax-deferred plan. This is especially true if you have more rights to access your money in the annuity.
The right to remove some money without a penalty is important. Most of the time CDs offer you the ability to take your interest but charge a penalty if you touch your principal. Some annuities, however, allow you to remove as much as 10 percent from the contract every year before the surrender period ends without an additional charge.
While you can ladder your CDs, schedule them for periodic due dates, you accept a lower rate of return when you do this in two ways. The first is by using a shorter period for some of the CDs, therefore a lower rate. The other way is by breaking your money down into several smaller CDs.
Check into a fixed annuity and see if it fits into your financial plans. It’s one way to diversify your funds, an important planning tool for everyone. A fixed annuity is a secure investment that gives you peace of mind and great benefits.
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