Most people that want a secure fixed investment look toward a CD as their ideal product. Often they don’t realize there are other options just as safe but often with more benefits than the CD provides. One of these products is a fixed annuity. There are several advantages over the traditional CD. One of which, is the tax-deferred growth of the annuity. Of course, if you’re young, this advantage can become quite a financial stumbling block.
The government doesn’t give out benefits without adding a few strings. Just like the IRA, 401k or Roth, if you remove the money before you’re 59 1/2 , you’ll find that you’re faced with not only the taxes on the growth of the annuity but also a 10 percent penalty. You can avoid this by taking substantial periodic payments but if you really need the money, that defeats the purpose since its based on your life expectancy, so they’ll be quite small.
For those close to 59 or older, the tax-deferred growth is a wonderful opportunity. During your working years, while your income and tax base is higher, you can tuck your money away and get tax-deferred interest. Once you retire and your income drops along with your tax-base, simply remove the interest and pay lower taxes on your return.
You need to be careful because of the taxation rules for annuities. The rules of LIFO apply in this case. LIFO is an acronym for last in, first out. It means for tax purposes, the IRS considers the last money into any fixed annuity contract is the first money you take out of it. Since interest builds after principle goes into the contract, that money is the interest. If you withdraw a large amount, you are right back to square one with a higher taxable income. The best method is to take funds out over several years. If you want the money sooner, consider taking an amount equal to half the interest late in the month of December and request the balance of the funds early the following year.
While some people frown on the use of a fixed annuity for already tax-deferred funds, such as IRAs or 401k rollovers, you need to look at the rates before you put the annuity out of the picture. Annuities have a tax advantage already, just as the IRA does. Some financial planners suggest you shouldn’t use an annuity for money that’s already tax advantaged. It does, however, make sense to do that if you get a far better rate on your annuity and better access to the money.
The right to remove some money without a penalty is important. Most of the time CDs offer you the ability to take your interest but charge a penalty if you touch your principal. Some annuities, however, allow you to remove as much as 10 percent from the contract every year before the surrender period ends without an additional charge.
You can do the same thing if you break apart your lump sum and put some in very short term CD’s and then mix the due dates of the other CD’s so they come due at different times. The caveat to this is that you often get a lower return on your money by taking smaller CDs for shorter periods. There’s also no guarantee that the CD will be due just when you need it the most. The right to withdraw funds from an annuity bypasses this problem.
Check into a fixed annuity and see if it fits into your financial plans. It’s one way to diversify your funds, an important planning tool for everyone. A fixed annuity is a secure investment that gives you peace of mind and great benefits.
Ryan N. Matthew provides the latest advice, marketnews, and facts that investors should consider before choosing the right anuity insurance for their retirement. Choosing the best annuity is a big decision and you should get all the facts, and look at all the annuity options. Click the links to learn more about anuities and get the best fixed annuity quote.
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