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Annuities

What Are Annuities?

An annuity is a long-term investment that will guarantee a stream of income later in life that you cannot outlive. It differs from a certificate of deposit (CD) in that, when you purchase an annuity, you do not need to pay taxes as your funds accumulate gains. Like your IRA and 401(k), you only pay taxes on the money when it is withdrawn. In other words, the money grows tax deferred.

However, there is a specified surrender period in which you cannot touch the money without facing a penalty from the insurance company. Most surrender periods last for 3-10 years depending on the policy terms. When you withdraw money from an annuity before the age of 59 ½, the IRS penalizes you 10% on the amount.

As you are approaching retirement, this is a good time to invest in an annuity since you will have access to the funds tax-free within a matter of years. Whereas, if you invest in an annuity earlier in life, you will need to wait much longer to withdraw your funds without penalization.

4 Types of Annuities

There are four different types of annuities you can choose from, each with different features available. Review the pros and cons of each annuity type below, then contact our financial advising team. We’ll help you select the right annuity type for your unique financial situation. Call 440-871-3067 for personalized annuity services in Cleveland, OH.

1. Fixed

Similar to a certificate of deposit (CD), fixed annuities pay a guaranteed minimum rate of return for a fixed period of time. Unlike CD interest, the interest gained on an annuity annually is not taxed. The money in your annuity will grow tax deferred until withdrawal. 

Fixed annuities are a simple and hassle-free option, but you do not have the opportunity to change your rate if there is an increase in the stock market. If rates increase throughout your contract, you are stuck at the rate you agreed upon when you purchased it.

2. Fixed Index

A fixed index annuity is like an investment vehicle with fixed features too. These annuities blend the guaranteed returns or fixed annuities with the potential stock market upside of variable annuities based on how you invest.

You can choose a capped rate, a participate rate or a spread. These options designate the percentage of your return based on market performance.

There are also different ways you can invest – some examples of investment options in a fixed annuity are: fixed bucket, S&P 500, Russell 2,000, etc. – which fluctuate based on the percentage changes throughout the year. The insurance company does not charge fees for a fixed index annuity unless you choose to add riders, but the upside rates of return are capped unlike a variable annuity.

3. Variable

Variable annuities are designed to let investors participate in the stock market and still enjoy the tax deferred gains and the guaranteed, lifetime income benefits of annuities.  

With a variable annuity, your premiums are invested in a variety of subaccounts, similar to mutual funds. Each subaccount has an investment objective and charge a management fee in addition to the insurance company’s fees.  The fees could be higher in a variable annuity if you add options riders such as a life-time income rider, a death benefit rider, etc.  

You have the opportunity for higher returns on your money that you would not see in a fixed annuity, but markets are volatile, so you also risk losing money with a variable annuity. 

4. Immediate

To purchase an immediate annuity, you make a single lump sum payment instantly to the insurance company. After that, the insurance company begins paying you an income stream for the rest of your life. 

You have the freedom to determine your payment schedule. For instance, if you choose monthly payments, your fist immediate annuity payment will come one month after you buy it.  There are many options for payment schedules when it comes to immediate annuities. Ask your financial advisor to explain all these income options.

Keep in mind, the rate of return to you or your beneficiary is based on your age and the annuity length you select. For example, a 10-year certain annuity will pay for 10 years. If, for example, you die after two years, your beneficiary will receive eight more years of payments.

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Michael G. Romanello, CEP, CLTC

Michael G. Romanello is a registered representative of and offers Securities through Independence Capital Company Inc.  Member FINRA/SIPC. 

5579 Pearl Road, Suit 100 Cleveland, OH 44129

Investment Advisory Services offered through Independence Capital Company Inc. 

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