Annuities - Part 3

Annuity Taxes of a Fixed Immediate Annuity

Fixed Immediate annuities can provide a steady income for a specified period of time that may even surpass your natural life. How long you choose to take these payments can depend on your present and future income needs, as well as your survivors’ requirements. But there is one more point that you may want to look at when reviewing the various payout options available, and that is the annuity tax implications to you and your beneficiaries. A portion of the money you would receive each year is a tax-free return of your investment. The balance is taxable, and those amounts can vary among the different payment periods. For instance, suppose that you are a 65-year old male, the IRS gives you a life expectancy of 20 years, and you are offered the following choices for a $250,000 investment: • A life only payout ceases when you die and will give you approximately $20,000 per year. Of this amount, $12,500 (1/20th of $250,000) would be tax-free and the balance ($7,500) taxable. If you live longer than 20 years, all $20,000 will be taxable. • A life with 20-year certain pays for 20 years or your lifetime, whichever is longer. You would [...]

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Posted by Bob Richards - December 31, 2008 at 10:23 am

Categories: annuity taxation, annuity taxes Tags: annuity taxes, fixed immediate annuity, prospectmatch

How to Possibly Cover Those Fixed Expenses

Even the best experts can’t predict how certain investments will perform or the income that you’ll see from them. Nevertheless, you might need a set amount of money each month to pay non-discretionary expenses like mortgage payments, auto loans, and life insurance premiums. Frequently these monthly outlays are fixed for a number of years. To pay these predictable expenses, you may want to consider a fixed, immediate annuity to provide a steady stream of income for your lifetime, your spouse’s lifetime, or the duration of the loan. And if you don’t like paying taxes, you may like the idea that part of that regular check from an immediate annuity is a tax-free return of your investment. If you find comfort from social security check, having the fixed income stream from a lifetime immediate annuity is quite similar. But what about expenses that you will always have and most likely will go up each year, such as real estate taxes, auto insurance, or homeowner’s premiums? Some immediate annuities offer several options to meet your future needs too, including an inflation protection rider that will let your income rise annually. Ability to make payments based on claims-paying ability of Annuity Company. Not [...]

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Posted by Bob Richards - December 30, 2008 at 11:52 am

Categories: immediate annuities, immediate annuity Tags: immediate annuity

Multi-Year Guarantee Annuities

Do You Like Fixed Annuities But Don’t Like Short-Term Rates? Fixed annuities can be popular among seniors. They are easy to buy, you know exactly how long you must tie up your money, and the IRS will let you defer the income tax on the earnings. But one point that may have stopped you from investing in an annuity is that some traditional fixed annuities do not lock in the interest rate for the duration of the contract. This means that after the initial period, which is typically one year, the return that the annuity company pays could possibly go higher or lower each year thereafter. However, there is a type of annuity that fixes the return for the entire contract’s term. This way you will know exactly how much you’ll earn while you own the contract. CD-annuities (also known as multi-year annuities) provide level interest rates for the entire term so you won’t get any surprise notices during this time. You select the term, which generally ranges from three to 10 years when you make the investment. At the end of the term, you will usually have a 30-day window to withdraw all or part of your money, or [...]

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Posted by Bob Richards - December 29, 2008 at 2:51 pm

Categories: cd annuity, multi year guarantee annuity Tags: cd annuities, cd annuity, multi-year guarantee annuities

Variable Annuities to Give your Grandchildren a Head Start on Retirement

Do You Want to Give Your Grandchild a Head Start on Retirement? If you are already retired, there’s a good chance that you receive Social Security. The likelihood that this stream of income will continue for the rest of your life, at least in some form, is probably pretty good. But what about your grandchildren? According to the government, Social Security’s financing problems are essentially long-term in their nature, and should not affect today’s retirees and near-retirees. However, people are living longer, and the first baby boomers are nearing retirement. The result is that the worker-to-beneficiary ratio has fallen from 16.5-to-1 in 1950 to 3.3-to-1 today. Within 40 years it could be 2-to-1. At this rate there may not be enough workers to pay scheduled benefits at current tax rates . This could have an impact upon your grandchildren’s retirement lifestyle. For example, imagine that your grandchild is 26 years old. What will he/she face in the future? Based on today’s scheduled levels, his/her benefits could be reduced significantly when he or she reaches retirement. As a practical matter, your grandchildren might have five or six decades before they retire. Based upon a 3% inflation rate, your grandchild might need [...]

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Posted by Bob Richards - December 28, 2008 at 10:04 am

Categories: variable annuities Tags: variable annuities, variable annuity

How Safe are Fixed Annuities?

Safety is a relative term because what is safe to one person is risky to another. For instance you may consider a U.S. Treasury bond one of the safest investments since it is backed by our government. But a true skeptic might say, “Suppose the U.S. government went belly-up? The bond could then be worthless.” Or he might argue that the government’s unabated printing of money will debase our currency making dollar investments worthless. Yes, he could have a valid point. However, putting the extremes aside, safety is one of the top reasons that people buy fixed annuities. There are several independent rating agencies that regularly assess the financial strength of insurance and annuity companies. Included are A.M. Best, Duff & Phelps, Moody’s, Standard & Poor’s, and Weiss Research. These firms will give you an evaluation of a company’s balance sheet strength, operating performance, and ability to meet ongoing obligations. In addition, all companies must follow the “legal reserve system.” This is a set of rules on asset management, accounting, and reserve requirements. The reserve requirements assure that funds are set aside specifically to protect against an insurance company’s portfolio losses. Furthermore, insurance companies are state regulated. And all 50 [...]

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Posted by Bob Richards - December 27, 2008 at 9:54 am

Categories: retirement income Tags: annity guranatee, annuity guarantee, annuity guaranty, annuity safety, how safe are annuities

Tread Carefully when Comparing Bonus Rates

Rebates, longer-term financing, and other temptations are often used by automakers to get you to buy or lease a new car. But these complications obfuscate how much you really pay in financing costs. Along a similar line, fixed annuity companies frequently have incentives to reward you for investing. One of the most widely used is the “bonus rate.” But if you aren’t careful, you might not get what you bargained for. Bonus rates look good at first buy may cloud your ability to see what you really earn. The bonus annuity rate is generally given during the first year or few years that you own the fixed annuity and can significantly enhance the initial return. Furthermore, the bonus increases the annuity’s principal on which future interest will be credited. Therefore, a bonus could possibly boost the overall yield over the contract’s term. However, the company may be offering this reward because you are expected to keep the contract for up to 10 years. If you remove your investment before that time is up, you may be hit with surrender charges that could more than wipe out the bonus you had received. Additionally, some annuities with high bonuses may not have [...]

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Posted by Bob Richards - December 26, 2008 at 10:31 pm

Categories: annuity rates, bonus annuity Tags: annuity rates, bonus annuity, bonus rate

Three Sources of Senior Citizen Retirement Income

Do you want to be a dependent senior citizen? You likely are according to this conclusion by the Economic Policy Institute, “For the typical person approaching retirement, the value of expected future Social Security retirement benefits represents the largest single source of wealth.” While this may be true, it’s a situation you don’t want to be in–dependent on the government and its political whims to determine your level of senior citizen retirement income. The more you can control and rely on your other sources of retirement income, the more independent you will be. Let’s discuss the ways in which you become independent with respect to your senior citizen retirement income. If you have a home, use a reverse mortgage when you need it. Most seniors are simply ignorant about how reverse mortgages work and then act out of ignorance. The other option is to find out how they work. A revrse mortgage simply allows you to tap the equity in your home as an income source. Right now, your home equity earns nothing, 0%. Would you keep money in the bank at 0%? Of course, when you die with a reverse mortgage, the equity in your home will be reduced [...]

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Posted by Bob Richards - November 26, 2008 at 12:34 pm

Categories: charitable gift annuity, immediate annuities, retirement income Tags: senior citizen retirement income

Should You Annuitize your Insurance Annuity?

What does it mean? Put simply, to annuitize is to start taking payments from an insurance annuity that may have been accumulating for some time. Specifically, you “trade” the accumulated annuity balance for a stream of payments over a specific term of years or life (a life annuity). An annuity, a policy that is paid into either by lump some or regular payments by the policyholder, and gains value via investment of those funds by the insurance company that holds the policy, in a manner agreed between the two parties, has many terms attached when it is created, and there may be an option to annuitize at a certain point or date set at the start of the insurance annuity agreement. What happens when I annuitize? When, and how, the policy becomes annuitized is determined by the rules and terms that are agreed by the policyholder with the insurance company, and these can be varied and dependent on many different factors. If the policy has a number of different options at which annuitization can take place, then it is up to the policyholder to decide what is best for him or her. In many cases, if the insurance company does not hear [...]

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Posted by Bob Richards - November 25, 2008 at 4:58 pm

Categories: annuitization, insurance annuity Tags: annuitization, annuitize, insurance annuity, life annuity

How to Make the Most of a Maturing Equity Indexed Annuity

Did you invest in an equity indexed annuity a few years back? If you bought it seven years ago, the maturity date may be approaching fast, and you might only have a small window of time to decide whether to renew the annuity or place your money elsewhere. If you look at what has happened to annuity rates and the markets since you bought your equity indexed annuity, you may understand why the specifications for a new contract might differ. Interest rates are at a four-decade low, and the markets have swung wildly. Therefore, there’s a good chance that you will see lower market participation rates and lower maximums (caps) on amounts credited to your equity indexed annuity. In addition, you may have to make a longer-term commitment on your new contract. The company might now have the ability to change participation and cap rates on the annual anniversary dates, whereas, your original contract may have kept the same numbers throughout the term. However, this could work in your favor. Because if the equity markets become less volatile, there’s the chance that index option premiums will decrease, thus allowing annuity companies to offer higher annual participation levels and caps. Times have [...]

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Posted by Bob Richards - November 11, 2008 at 6:10 pm

Categories: 1035 exchange, equity indexed annuity Tags: equity indexed annuity, surrender charge

Annuities Require Careful Tax Planning

One popular benefit of a fixed annuity is that you can let the interest in the account compound each year without paying income taxes. This allows your money to possibly grow faster as compared to fully taxable investments that pay similar, before-tax returns. When you start making withdrawals, the percentage of income that is taxable depends on how you structure the distributions. Your beneficiaries, however, may not have that flexibility, and could face a big annuity tax bill on the inheritance. Assuming your annuity is not held in a tax-qualified account, such as an IRA, your heirs will have to pay income tax on the built-up earnings when you die. Suppose that you put $250,000 into a fixed annuity a number of years ago, and now it is worth $450,000. If you died today, your beneficiaries would receive the $450,000, and would have to pay as much $70,000 in federal income taxes on the accumulated profit (maximum federal income tax rates are currently 35%). To help your heirs keep the money you earned, you may want to consider purchasing a life insurance policy for the amount of the estimated tax bill. You could pay the premiums yourself, ask your beneficiaries [...]

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Posted by Bob Richards - November 10, 2008 at 8:54 pm

Categories: annuity taxation, annuity taxes Tags: annuities, tax planning