Understand the basics

Our team at Relayer Benefits Group wants to make sure that you know everything you need to know in order to make important decisions in preparation for your retirement. Do you have questions about annuities? Get  in touch with us today to set up a one-on-on appointment or attend one of our educational seminars.

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Understanding Annuities

We can help you in understanding annuities. Let’s start with a definition. Essentially, an annuity means that you receive money on a fixed interval. There are different types of insurance annuities, including fixed indexed annuities (or FIAs), variable annuities, and fixed annuities. Each of these products may offer a recurring income payment, but only fixed annuities and FIAs offer protection of principal. Hence, those are the kind of annuities our firm focuses on. These products aren’t investments, but rather insurance products.

So, what is an annuity? An annuity is a contract between you and an insurance company. Some annuities may pay out an interest rate if its associated index rises, but others, such as a fixed annuity, remain the same throughout the term of the annuity. Either way, your principal is not at risk in the stock market. With an FIA, if the market goes up, you may see an increase in your return, but if the market goes down, you don’t lose.

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What is a Fixed Indexed Annuity?

An FIA doesn’t go up and down with the stock market. It’s an insurance contract  that you purchase. The insurance company that issues your policy protects your principal. Regardless of what happens in the market, the contract states that your principal is safe. Also, an FIA agreement may provide potential indexed interest. Your FIA policy may agree to provide you regular income payment on a preset schedule. It’s also required by law that the insurance company set a reserve aside to cover any claims. For this reason, with certain FIAs, insurance companies can offer a guaranteed* lifetime income.

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The Steps of an Annuity

Your annuity has a period of time in which it remains in the annuit contract. This is what allows your money time to accumulate before you begin taking in income. Fixed Indexed annuities provide a set interest rate to their owners. FIAs, in addition, provide a potentially higher rate while the index is up, but protect your principal while the index is down. During this accumulation phase, your money has time to accumulate.

Distribution is the phase when you can begin taking an income. Your payments can now begin, and you have choices as to how exactly you get your money. You can decide you want an annual payment, for instance, or a monthly payment. You can even choose to receive an income for life. Most annuity products have much flexibility and options available. Based on your needs, you may decide to have some of the optional benefits. This distribution phase is when retirees may begin taking their lifetime income.

To reiterate, the first step of an annuity is allowing time for your money to accumulate, and step two is to begin the distribution of lifetime income. The details of different annuity contracts will be different, of course, but these two steps are universal when it comes to FIA contracts.

Taxes and Annuities

Money for When You Need it Most

Earnings in an annuity happen tax-deferred. This means the money accumulates without paying taxes, and only when you take the money out does the income become taxable. But even then, you pay your regular income tax rate. For those who wish to have a tax-deferred income option, a fixed annuity or FIA may be helpful in that way.

Depending on your situation, other tax benefits may be possible as well. In the case of early retirement profit-sharing, for example, you may be able to roll over your plan into an annuity. This could be especially helpful if you’re under the age of 59 1/2 but wish to retire now. The specifics of this type of transaction impact the tax implications, of course, so be sure to seek professional guidance before rolling money into an annuity.

Want to learn more about how annuities work? You can attend one of our  seminars or webinars today at no additional cost!

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