Understand The Basics

Annuity Basics

If you’re looking to get regular payments on a fixed schedule, that’s the start of annuity basics. There are, of course, different types of annuities, but typically, they’re set up so that you receive an income for life. Furthermore, retirees who use an annuity as part of their retirement income strategy have protection of principal as a key benefit. With an annuity, you can have a lifetime income as well as no loss of principal. This is because annuities are insurance products and not stock market investments.

An annuity’s terms are outlined in its contract. Annuities come with some guarantees* that can’t be said of other accounts. For instance, some annuity basics include the promise that your initial deposit won’t suffer loss. Your principal will be protected, even when the stock market dips. The types of annuity products that offer this benefit are the ones our firm focuses on. 

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Walking You Through the Stages

Annuities have two main stages: the accumulation stage and the distribution stage. The accumulation stage is the time during which your money grows, and the distribution stage is the time when you can withdraw the money for income. The benefits you select and the amount of money you contribute will affect the outcome. Reach out to us to get more educated about your choices during each stage.

The Accumulation Stage

The accumulation stage gives your annuity time to grow. This works differently based on which type of annuity you have. For example, a fixed indexed annuity (or FIA) gains interest whenever the index it's connected to is up. However, the money in the FIA isn't directly invested in the stock market. In this regard, an FIA differs from, say, a variable annuity. No matter which type of annuity you have, however, the first stage is a waiting game. You let your money stay put and give it time to increase.

The Distribution Stage

Next, there's the distribution stage. This is the stage in which you may begin taking income on the money in your annuity. One of the annuity basic principles is that you get an income for life. This is one of the main draws of the product, and the reason retirees often choose them. This is especially true in regards to an FIA. There's flexibility in your income payments, as well. You can choose between annual, monthly, or quarterly payments. You may also have flexibility in the form of income increases over time, death benefit options, and more. Some products even offer possibilities for increasing your income if a long-term care situation should arise.

The Stages of an Annuity and Taxes

During the first stage of accumulation, your money grows without taxation. The interest is tax-deferred. You pay taxes specifically when you take the money out. You only pay ordinary income tax at the time of withdrawal, so depending on your tax bracket at the time, you might find yourself in a good tax position.

Additionally, there may be other tax advantages. For example, An FIA may be an ideal option for those planning on retiring early. Let’s look at the specifics. Firstly, those who are under age 59½ often pay a penalty if they access their retirement money before they reach that age. However, there may be an alternative for those who get a lump sum from their 401k. If you got this lump sum as part of a severance or early retirement package, you may be able to roll it over into an annuity. For some, this rollover process could save thousands of dollars in taxes. Of course, we highly recommend meeting with a tax advisor to discuss this strategy. We can also offer information on how an annuity could be a viable option for you.

Want to learn more about annuity basics? Call us today, or attend one of our seminars!

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