You have a lot of living to do, so it’s important to get the most “life” out of your assets. Annuities offer that opportunity with a wide range of benefits, including a variety of investment and income payout options. If you’re a suitable investor, they’re an attractive way to save for—and get the most out of—your retirement, while also planning ahead for your family.
Essentially, when you buy an annuity, you’re entering into a contract with the insurance company that issued it. In some ways, they resemble qualified retirement plans.
- Your earnings grow tax deferred until it’s time to begin receiving payments back from the issuer—if kept invested, earnings that are often larger than from a comparable taxable option.
- You may have to pay a 10 percent penalty if you start taking withdrawals before age 59 ½.
Unlike qualified retirement plans, annuity contributions aren’t tax deductible, but paid only when the earnings are distributed.
Here are some of the basics to understand before you talk with your trusted advisor about investing.
Who are the players?
An annuity contract is a four-member “team”:
- The issuer is the company, like an insurance company, that issues the annuity.
- The owner is the individual who buys and contributes to the annuity.
- The annuitant is usually the owner and the person who is used as the benchmark to determine the amount and timing of the benefits and their distribution.
- The beneficiary is who receives a death benefit when the annuitant passes.
What are the types?
Annuities come in four basic types and your decision to invest is based on the two different phases of an annuity: how you want it to grow (the accumulation phase) and when you want to start receiving benefits (the distribution phase).
Fixed versus variable
With a fixed annuity, the issuer agrees to pay a specific amount at a specific date. This means that the issuer will be investing your money in safe products with predictable returns, which makes them a choice if you’re risk averse. The drawback for the safety and predictability is potentially lower returns that can be impacted by inflation.
If you can tolerate more risk in exchange for possibly better returns, then variable annuities could be an option. The issuer will invest in portfolio of subaccounts, similar to mutual funds however annual expenses are likely to be much higher than on a typical mutual fund, that you select, and your eventual payout(s) will be determined by the portfolio’s performance.
Immediate versus deferred
An immediate annuity is when you make a lump-sum payment to the issuer, establish a payment schedule, and immediately (usually within a month) start receiving your payments. While there are both fixed and variable flavors of immediate annuities, the latter is the most common. Two important-to-knows: They can’t be cancelled and if your annuity outlives you then the payments end and any remaining assets are kept by the issuer.
Deferred annuities (there are three different types with different behaviors: fixed, indexed, and variable) let you accumulate earnings and have them distributed at a future date.
- Accumulation is when you’re making payments into your annuity and the investments within it continue to be invested and grow.
- Distribution is when your contributions and growth stop and your earnings payouts begin.
Unlike immediate annuities, deferred annuities often have a death benefit to protect the remaining assets for your heirs. Non-advisory deferred annuities come with early withdrawal surrender charge penalties, on top of income tax implications, so it’s important to understand your liquidity before investing. Advisory annuities will not have any early withdrawal surrender charge penalties. I question this claim, see page 16 of the attached advisory annuity summary prospectus.
How do I get my earnings?
As mentioned above, you can go down two paths. First, you can take the immediate route and start receiving your payouts within the first month or few months of investing. The second route is deferred, which will pay you a guaranteed income stream on a schedule you set (monthly, quarterly, yearly), whether it’s over a number of years or your entire lifetime once payouts start. You can also receive annuity payments over both your and the lifetime of another person: a joint and survivor annuity.
The amount you receive for each payment period will depend on how much money you have in the annuity, how earnings are credited to your account (whether fixed or variable), and the age at which you begin the accumulation phase. The length of the distribution period will also affect how much you receive. If you are age 65 and elect to receive annuity distributions over your entire lifetime, the amount you will receive with each payment will be less than if you had elected to receive annuity distributions over five years.
When is an annuity appropriate?
If you look at the beginning of these “basics,” you’ll see the term “suitable investor.” Annuities can be powerful retirement tools, but they aren’t right for everyone.
One important distinction is “tax deferred” versus “tax deductible,” because annuities are the former, not the latter. That’s why many experts advise funding and maxing out other retirement plans first before investing in annuities, which offer no limits.
Annuities are designed to be longer-term investment vehicles that come with the previously mentioned penalties for early withdrawal, so they shouldn’t be purchased if you think you’ll need frequent, immediate access to your assets.
For all of these reasons and more, now that you know the basics, it’s important to your current and future financial “self” to speak with your trusted advisor about whether adding annuities to your investment and retirement plans is right for you.
For more information about retirement, investing, and financial planning, talk to your Truist Premier Banking team.
An annuity is an insurance product designed for long-term savings. There are considerations to keep in mind, such as a surrender-charge period on full surrenders and on certain withdrawals. Account value will be impacted by withdrawals. These vary by contract so you want to ensure you are aware of these elements before you purchase an annuity. Withdrawals many be subject to federal and/or state income taxes. An additional 10% federal tax may apply if individuals make withdrawals or surrender their annuity before age 59 ½ All guarantees are subject to the claims paying ability of the issuing insurance company.
Variable Annuities are long-term investments and involve fees and expenses not typically associated with other investments. Surrender charges may apply in the early years of an annuity contract. Earnings will be taxed as ordinary income at withdrawal. Withdrawals prior to age 59 ½ may be subject to a 10% penalty. Variable annuities values fluctuate so that an investor’s shares, when redeemed, may be more or less than their original cost.
Investing in an annuity within a tax-deferred account such as an Individual Retirement Account (IRA) will provide no additional tax savings.