What is an annuity?
An annuity is a long-term investment between you, the annuitant, and an insurance company, the annuity issuer. Under this contract, you pay after-tax funds to the annuity issuer, who then invests your principal to meet your financial objectives and pays you or your beneficiary back with earnings (subject to the claims-paying ability of the issuer).
If you have a fixed annuity, your interest rate is guaranteed. With a variable annuity, your earnings are linked with the fluctuating performance of your investments and may be worth more or less than your principal when redeemed. In addition, you have added control in how your money is invested, creating a higher potential for growth. However, this option comes with a higher risk in return.
Unlike other investment plans, there is no limit to how much you can invest in an annuity. Your funds will steadily grow with a tax-deferred status, and you pay your regular tax income rate on only your earnings upon withdrawal.
What annuity options are available?
An immediate annuity can begin paying you right away. You can choose whether you want your income guaranteed for a specific time period or if you want lifelong payments. The amount of your payments is calculated based on your principal and your life expectancy.
A deferred annuity is broken up into two phases:
- Accumulation: This is when you add money to your annuity, whether you pay in a lump sum or you make a series of payments. You can continue to let your account grow tax-deferred for an indefinite amount of time.
- Distribution: This is when you begin withdrawing money from your annuity whether you take out systematic withdrawals or you annuitize to supplement your finances with a regular stream of income for life.
Why discuss buying an annuity with an attorney?
Annuities can be a valuable tool in Estate Planning (Extra Page 3) and Charitable Giving (Extra Page 2). An annuity contract can help you to leave a monetary legacy behind for your loved ones or for a charity.
A charitable gift annuity allows the donor to provide a gift to a charity while receiving fixed payments (usually monthly or quarterly) for the remainder of your life or of your spouse's life if giving as a couple. The donor may also be eligible for a tax deduction when creating the annuity. A portion of the payment you receive under the terms of the annuity may also be tax-free.
Contact Us to learn more about planning your future with an annuity. While we do not sell annuities, we are happy to answer your questions and help identify if an annuity is the best option for your needs.