How to Understand Fixed Annuities
Fixed annuities are a type of supplemental retirement investment. As an account structure, the fixed annuity is given tax-deferred growth by the Internal Revenue Service. Investors seeking the benefits of tax-deferred growth need to adhere to the rules and regulations of fixed annuities imposed by the IRS as well as the rules and regulations imposed upon the annuity contract by the insurance company that sells and manages the product.
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Instructions
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Think conservatively. A fixed annuity is a financial product that provides a specified rate of return over time and is 100 percent guaranteed by the insurance company managing the annuity. Fixed annuities are for investors who do not want to see principal deposits fluctuate in value but want to maximize fixed-income returns.
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Defer taxes. Money goes in and grows without generating taxable income until you take money out. If the fixed annuity is a qualified retirement plan such as an individual retirement account, 100 percent of the distributions are added to income; if it isn't a qualified plan, then only the earnings are added to income.
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Read the fixed annuity withdrawal terms. Most fixed annuities allow investors to take out the interest or up to 10 percent of the account value annually without penalty. Withdrawing more than the allowable amount results in a surrender charge that may or may not be assessed to principal---surrender charges exist during the first years of the annuity and decline with each anniversary date.
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Prepare your estate. Fixed annuities allow the owner to name primary and contingent beneficiaries, allowing the asset to avoid probate. The money is still counted for estate taxes and beneficiary distributions above the principal are also added to income, though they can be stretched over a five-year period.
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Tips & Warnings
There are four parties to a fixed annuity: owner, annuitant, insurance company and beneficiary. The owner and annuitant are often the same person but don't need to be. The owner buys the policy and pays taxes on earnings. The annuitant is the person whose life the policy distributes on. Beneficiaries receive the cash value upon death from the insurance company that writes the policy.
