Advantages of a Deferred Annuity including Retirement Benefits
Advantages of a Deferred Annuity including Retirement Benefits
Should You Buy a Deferred Annuity?
Deferred annuities offer many advantages to investors:
Tax deferred investments grow without being taxed until withdrawal. At retirement, you may find yourself in a lower tax bracket. You will now pay fewer dollars in taxes on all of your earnings, including your annuity investment.
Deferred annuities have no cap on contributions. While the IRS limits contributions to other types of investments like the IRA, there is no such limit on annuities. You can use earnings from your annuity to fund other investments and still avoid taxes.
Your heirs can receive a death benefit. If your death occurs before you withdraw funds, your beneficiaries will receive the remaining balance of your annuity without waiting for probate. Funds will be distributed immediately. Surviving spouses, as new owners of annuities, can choose to continue saving or receiving payments. If distribution of income had begun at the time of death, beneficiaries would continue receiving payouts at the same rate as you did. Beneficiaries inheriting annuities, which have not begun distribution, can choose a lump sum payment. Taxes will be due and payable on any benefits received.
Immediate Annuities
Immediate annuities are purchased by making one large contribution. Interest begins accumulating immediately. Withdrawal can begin within 30 days. Payment amounts can be fixed or variable, do not change, and are based on your age and the current interest rate at the time of purchase. Variable immediate annuities have payment amounts that vary according to the performance of the investment vehicle chosen by you. Although these annuities have incomes that fluctuate with market trends, they are designed to keep pace with inflation to provide an increase in payment amounts over a long period.
Once you invest in an immediate annuity accessing the principal amount is not easy. Keeping some of your funds in an easily assessable savings account will ensure that you get through any small financial difficulties.
Choosing an income for life option with no refund guarantee could imperil your principal. With this option, investors who die before full distribution of their principal forfeit the principal to the insurance company, not their heirs. Discuss all of your options with your financial advisor before purchasing your annuity.
Beware of Inflation
Before selecting your immediate annuity, consider the consequences of inflation. Investments that will outpace inflation are crucial. Variable immediate annuities historically have the best record of beating inflation by allowing you the option to participate in the stock market. Your annuity can continue to grow even after you begin receiving payments. There is some risk that your principal and payments can drop along with the stock market. In the short term, this can cause apprehension. It is very important to keep your focus on the long-term results of the stock market if you choose a variable annuity. If you want both stability and the opportunity for growth offered by the stock market, consider dividing your investment between fixed and variable immediate annuities. Your investments will benefit both from the growth potential of the stock market and the stable income from a fixed immediate annuity.
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