Tax Consequences to the Annuity Beneficiary
Annuities are especially attractive to retirees because they assure an income for life. They’re often held as deferred annuities as a back up for those later retirement years as a supplement to other retirement income or when savings become depleted. But many retirees will die before tapping their deferred annuity. What are the tax consequences to the annuity beneficiary and should other options be arranged? A deferred annuity offers a distinct tax-benefit. It’s earning grow tax-deferred. For the same annual return as a taxable investment, a tax-deferred investment compounds faster because none of the earnings are taxed away each year. However those tax-deferred earnings will eventually be taxed upon withdrawal, whether by you or the annuity beneficiary. Your contributions to the annuity, though, will not be taxed. This is the case in ‘nonqualified’ annuities which are funded with after tax contributions. Annuitant’s taxation If a partial withdrawal is made, the IRS presumes that earnings come out first – so that these are completely taxable. But under regular monthly payments – a portion of each payment is not taxed but treated as a return of your nontaxable contributions. An exclusion ratio calculated by the insurance company designates that untaxed portion. When, [...]
Categories: annuity beneficiary, annuity taxation Tags: annuity beneficary, annuity taxation, prospectmatch
Understand the Advantage of Tax-Deferred Investment Growth of Deferred Annuities
Sometimes, investors don;t understand the benefit of tax deferral. They believe if they need to pay the tax eventually, what difference does it make to defer the tax. This article explains the benefit clearly so you make the right decisions with IRAs, annuities and other tax deferred opportunities. The secret to growing your investments is its compounding rate. The higher it is, the faster your investment grows. But that’s only half the story. Increasing the compounding rate from 6% to 8% will produce more than that 33% increase in your investment over the years -see first table. That’s the magic! And that’s why tax-deferred investments are such an advantage. Let’s take a look at some results… Per Cent Greater Accumulation for 8% over 6% Compound Rates of $10,000 Year 6% 8% % more 5 13,382 14,693 10% 10 17,908 21,589 21% 15 23,966 31,722 32% 20 32,071 46,610 45% 25 42,919 68,485 60% 30 57,435 100,627 75% Taxable accounts are those that generate interest or dividend earnings that are subject to annual taxation. If your investment return is 10% and your income tax bracket is 28%, then 28% of that 10% (i.e. 2.8%) of that investment return is lost to [...]
Categories: tax deferral Tags: benefits of tax deferral, tax deffered
A Fixed Term Single Premium Immediate Annuity Helps Keep You in Control
In retirement, a guaranteed income can reduce your stress and allow you a less-panicked approach to investing. With no pension, you may be relying on Social Security as your only assured income. Buying a life annuity can guarantee that extra income, but you lose both control of your assets and their use as your legacy. What’s a solution to this dilemma? The fixed term SPIA solution Use a single premium immediate annuity (SPIA). In this case we’re looking at a fixed term SPIA where you purchase the SPIA for an immediate payout, but only for a fixed term – perhaps 5, 10 or 15 years. The idea is to buy the fixed term ingle premium immediate annuity with only 50% of your savings. The term you choose depends on how much extra assured income you need and what you plan to do with your other 50% of savings. Let’s see some examples for this approach. New retiree – getting adjusted Take this hypothetical example. If you’re a 66 year old man beginning retirement with $400,000 in savings but no company pension, you may want to complement your Social Security income with single premium immediate annuity income while you pursue some endeavour for [...]
Categories: immediate annuity Tags: immediate annuity
Should You Choose an Immediate Variable or Fixed Annuity?
When you buy an immediate annuity, you pay a lump sum to an insurance company and begin receiving monthly payments right away. An immediate life annuity is attractive to retirees because it guarantees them a lifetime income. But should they choose an immediate variable annuity (IVA) or an immediate fixed annuity (IFA)? The IFA gives you a guaranteed but fixed payment – generally monthly for your lifetime. That’s because the underlying annuity investment relies on long term bond investments purchased by the insurance company. But in twenty years the purchasing power of that fixed monthly payment may be significantly less due to inflation. The IVA also offers a lifetime (monthly) payments, but those payments will vary. That’s because the underlying annuity money is invested in the subaccounts that fluctuate with the underlying securities (e.g. stocks and bonds). The attraction of the IVA is based on the hope that over time, the investment markets will rise and help offset inflation by producing larger monthly payments. The danger is that the stock market can go into a slump and reduce those payments. With the IVA, you can change how your annuity is invested among subaccounts associated with it. You can also [...]
Categories: immediate annuity Tags: immediate fixed annuit or immediate variable annuity
CD versus Fixed Annuity Comparison
CD versus Deferred Annuity Comparison Safety, Return, and Investment Time Retirees with cash often seek an investment with a lot of safety. Holding a certificate of deposit (CD) gives you that safety but sacrifices investment return. Let’s compare a CD to a deferred fixed annuity for safety, return and investment time. Then you can choose what’s best for you. The Safety Issue Banks offer CDs. The Federal Deposit Insurance Company (FDIC) guarantees any investment in a bank up to $250,000 (through 2009) against the bank’s failure. If you plan to invest more than that, spread it between different banks – not different accounts in the same bank – so all your holdings are FDIC guaranteed. Bank failures are not all that uncommon. A deferred fixed annuity hasn’t any FDIC protection. But it’s still considered a conservative investment. First it’s backed by the financial strength of the company that issues the annuity. So, before buying a deferred fixed annuity, check the insurance company’s financial rating. Independent rating companies such as Moody’s, A.M. Best, Standard & Poor’s and Fitch provide this information to you. As a safety backup in case of failure, many insurance companies are affiliated with a guaranty association in [...]
Categories: CD, fixed annnuities Tags: cd vs fixed annuity comparison
Provide for Your Beneficiary Survivor with a Reversionary Annuity
When couples are in their retirement, circumstance may arise where a wife is in jeopardy of losing a living income when her husband dies. Perhaps the husband – before a late marriage – had opted for a ‘single life’ payout for his pension or annuity. Or, perhaps a 50% reduction of his pension payout for his wife just won’t be enough. How can one spouse assure an adequate income for his surviving spouse when a pension or Social Security benefit is involved? Normally, you might say, ‘just go out and buy life insurance on the husband’s life so the wife can live off the death benefit’. But buying permanent life insurance may be too expensive for a retiree. And then there’s the issue about whether or not the wife can manage it to maintain an income for her life. A reversionary annuity as an alternative A reversionary annuity would supply an immediate annuity payout for the life of the wife at the death of the husband. The funding for the ‘immediate annuity’ comes from the life insurance death benefit associated with the husband’s reversionary annuity premium payments. The reversionary annuity is similar to a combination of term life insurance policy, a [...]
Categories: reversionary annuity Tags: prospectmatch, reversionary annuity
A Stretched-Out Legacy Benefit to Your Retirement Annuity
Have a deferred retirement annuity you might not get to use? You can pass its tax-deferred earnings advantage to your annuity beneficiary and supply her income over much of her life. A non-qualified annuity is one you funded with after tax dollars. You can provide your assigned annuity beneficiary – after you die – with a lifetime income stream from it. Its holdings can be “stretched out” over the beneficiaries’ lifetime, creating what’s known as a non-qualified stretch annuity. The ability to stretch out distributions to a beneficiary comes from IRC section 72(s) which requires non-lump-sum annuity distributions to begin within one year of the annuity owner’s death. But the option to stretch out this distribution must be elected within 60 days of after the benefit is payable. So this rule preserves the non-qualified annuity’s tax-deferral advantage for the beneficiary and allows him to avoid a high taxation rate that an all-at-once payout would produce. How long can your beneficiary stretch annuity payments? He can either have payments made to him over the IRS’ projected remaining life expectancy for his age or simply have the payments annuitized under one of the insurance company’s annuitization options. These options would be [...]
Categories: stretch annuity Tags: retirement annuity, stretch annuity
Pros and Cons of Fixed Annuities
For retirees, the most attractive feature of fixed annuities is the assurance that it’ll provide a fixed income for life. But all investments have their good and bad points; and fixed annuities are no different. Let’s overview some of their advantages and disadvantages summarized in the table. Advantages The three important features of an annuity are tax-deferred accumulation, guarantee of principal, and guaranteed life income. The tax-deferred accumulation – in comparison to a similar taxable investment – allows for greater accumulation since earnings are not taxed away annually. Annuities have been conservative vehicles for investment. Of course you should always check out the strength of any insurance company you’re considering buying from. A good source is to get the Comdex rating of 80 or better from Vital Signs (see a financial professional) or a Weiss rating of B or better. With the guaranteed life income payout option, you don’t have to worry about market downturns that could rob you of income. Also if you can put off your payout until later, you’re monthly payout will increase not only from increased earnings but from your reduced life expectancy. Disadvantages Because an annuity is a long-term investment with tax-deferred status, the IRS [...]
Categories: fixed annnuities Tags: fixed annuities
Might You Live to 100?
Live to 100. Sounds great. But what are the downsides of longevity? “How can there be downsides?” you may ask. After all, you’d have more time to golf, go fishing, and spend with the grand-kids. Well, the risk may be that if you hadn’t planned to live that long you could end up running out of money. Very few people have sufficient retirement savings to live to 100. Yet, if you are already age 70, life expectancy of living to age 100 is 3% (one of every 33 people). If you make it to age 80, then your life expectancy to 100 jumps to 4% (one out of 25 people). So how long of a retirement should you plan for? How can you prepare for significant longevity? According to the IRS longevity tables, a 70-year-old person is expected to live for 17 more years to age 87. However, this is an average. Half of the 70-year-olds will live longer, and half will not. Therefore, a 70-year old individual who is basing his or her retirement plan and spending habits on living to 87 is rolling the dice. Furthermore, when you consider that there are more than 70,000 U.S. centenarians who represent the fastest-growing segment [...]
Categories: immediate annuity, longevity, reverse mortgage Tags: fixed annuity, life expectancy, longevity, prospectmatch, reverse mortgage
Poor Health Can Be a Factor in Producing More Retirement Income
There’s a type of annuity that pays you more if your health profile is not good. This may sound strange, but here’s how it works: SPIA, which stands for Single Premium Immediate Annuity (also referred to as health adjusted immediate annuity), has long been a popular investment for obtaining a fixed income which cannot be outlived (income for life). With the income for life option, the issuing insurance company calculates the size of your monthly payment based on standard life expectancy tables, based on an analysis of your health. Once calculated at the beginning, you continue to receive the same monthly amount, regardless of how long you live. It’s almost like getting a second social security check. companies take into account your individual health condition and use that information to calculate your life expectancy. If your health records indicate conditions that could lower your life expectancy, this is factored into the monthly payment you receive and increases the monthly payment. You then receive this fixed monthly amount no matter how long you live.| Take this hypothetical example. A man age 70 decides to obtain a SPIA. He deposits a $100,000 premium and based on his standard life expectancy of 16 years, his [...]
Categories: lifetime income Tags: health adjusted immediate annuity, lifetime income, prospectmatch
