Immediate
Annuity
With an
immediate annuity, your income payments start right away (technically,
anytime within 12 months of purchase). You choose whether
you want income guaranteed for a specific number of years
or for your lifetime. The insurance company calculates the
amount of each income payment based on your purchase amount
and your life expectancy.
Deferred
Annuity
A
deferred annuity has two phases: the accumulation phase, where
you let your money grow for a while, and the payout phase.
During accumulation, your money grows tax-deferred until you
take it out, either as a lump sum or as a series of payments.
You decide when to take income from your annuity and therefore,
when to pay the taxes. Gaining increased control over your
taxes is one of the key benefits of annuities.
The
payout phase begins when you decide to take income from your
annuity. For most people, this is during retirement. As your
needs dictate, you can take partial withdrawals, completely
cash-out (surrender) your annuity, or convert your deferred
annuity into a stream of income payments (annuitization).
This last option is essentially the same as buying an immediate
annuity.
Think of an annuity as an umbrella. When money is placed
under the umbrella or annuity contract, it is treated differently
as far as taxes go.
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The
money that you put in an annuity is referred to as a
premium, it's your original contribution or principal
contribution. Since you already have paid taxes on it,
it never again will be subject to taxation. This assumes
that you haven't purchased an annuity as part of a qualified
retirement program such as an IRA, 401(k), TSA or 457
plan.
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The
money that you put into an annuity will earn interest
or receive dividend income or capital gain distributions.
These "earnings", unlike money in a savings account,
mutual fund, certificate of deposit are not taxed in
the year in which they are earned. Thus the "earnings"
will continue to grow and compound tax free until withdrawn.
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However
there are no penalties on distributions:
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Made
after your 59 1/2.
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Made
on or after the death of the owner of the annuity.
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If
the taxpayer becomes disabled.
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A
part of a series of substantially equal periodic
payments (not less than annually) for the life
(or life expectancy) of the taxpayer or joints
lives (or joint expectancies) of the taxpayer
and his or her designated beneficiary.
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Made
under a single premium immediate annuity with
a starting date no later than one year from the
annuity purchase date.
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Made
under certain annuities issued in connection with
a structured settlement agreements.
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Avoid
Probate
If a premature death should occur, the accumulated funds within
your annuity may be transferred to your named beneficiaries,
avoiding the expense, delay, frustration and publicity of
the probate process. Like most assets, the annuity is part
of your taxable estate. Your heirs can generally chose to
receive a lump sum payment, or a guaranteed monthly income.
What
is A Fixed Tax-Deferred Annuity
What
is a Fixed Tax-Deferred Annuity?
A Fixed Tax-deferred annuity, also referred to as a tax-deferred
annuity, is a contract between you and an insurance company
for a guaranteed interest bearing policy with guaranteed income
options. The insurance company credits interest, and you don't
pay taxes on the earnings until you make a withdrawal or begin
receiving an annuity income. Your annuity contract earns a
competitive return that is very safe.
Tax-Deferred?
Tax-deferred means postponing your taxes on interest earnings
until a future point in time. In the meantime you earn interest
on the money you're not paying in taxes. You can accumulate
more money over a shorter period of time, which ultimately
will provide you with a greater income.
Savings Advantages
Many people today are using tax-deferred annuities as the
foundation of their overall financial plan instead of certificates
of deposit or savings accounts. Although CD's and Annuities
are very similar there are significant differences between
the two. The most important difference is that annuities allow
for the deferral of the taxes due on the interest earned until
the interest is withdrawan. By postponing tax with a tax-deferred
annuity, your money compounds faster because you can earn
interest on dollars that would have otherwise been paid to
the IRS. Later, if you decide to take a monthly income, your
taxes can be less because they will be spread out over a period
of years. Like Certificates of Deposits, annuities have a
penalty for early surrender, however most annuity contracts
have a liberal "free withdrawal" provision.
Tax Advantages
You pay NO taxes while your money is compounding. You can
also pay a lower tax on random withdrawals because you control
the tax year in which the withdrawals are made, and only pay
taxes on the interest withdrawn. Tax deferral gives you control
over an important expense - your taxes. Any time you control
an expense, you can minimize it. The longer you can postpone
this particular expense, the greater your gain when compared
to the gain you would make with a fully taxable account.
The Tax-Deferred Advantage
To illustrate the increased earnings capacity of tax-deferred
interest, compared below to fully-taxable earnings. $25,000
at 6.0% will earn $1,500 of interest in a year. A 28% tax
bracket means that approximately $420 of those earnings will
be lost in taxes, leaving only $1,080 to compound the next
year. If these same earnings were tax-deferred, the full $1,500
would be available to earn even more interest. The longer
you can postpone taxes, the greater the gain.
Tax-Deferred
vs. Fully Taxable
Compare the Return
$107,297 Accumulated in a Tax-Deferred Annuity
$71,966 Accumulated in a Taxable Account
The Difference:$35,331
Note: That at an annuity's guaranteed rate of 4%, the return
after 25 years would be $66,646.
Safety
Your tax-deferred annuity is safe. A qualified legal reserve
life insurance company is required to meet its contractual
obligations to you. These reserves must, at all times, be
equal to the withdrawal value of your annuity policy. In addition
to reserves, state law also requires certain levels of capital
and surplus to further increase policyholder protection. Legal
reserve refers to the strict financial requirements that must
be met by an insurance company to protect the money paid in
by all policyholders. These reserves must be at all times,
equal to the withdrawal value (principal plus interest less
early withdrawal fees, if any) of every annuity policy. State
insurance laws also require that a life insurance company
must maintain certain minimum levels of capital and surplus,
which provide additional policyholder protection.
No More 1099's
There is no withholding tax while your annuity is compounding;
it is completely tax-deferred. If you request a distribution
(random withdrawals or annuity income), taxes will be withheld
- unless you elect differently. Your election not to withdraw
can be made at the time you make your request. Because the
interest is tax-deferred, it is not necessary to issue a From
1099 while your money is compounding. Only when your interest
is distributed (withdrawal or annuity income) will a Form
1099 be sent, reflecting the amount of interest actually received.
When Does My Money Mature
An annuity policy does not "mature" like a bond or Certificate
of Deposit. Both your principal and interest will automatically
continue to earn interest until withdrawn or you reach age
100. You can let your money continue to grow, make withdrawals,
or begin receiving an annuity income
at any time.
What
is the Penalty Tax and When Does it Apply?
An IRS penalty tax, currently 10%, must be paid on any withdrawal
of interest or qualified premium made prior to age 59 1/2.
A strong benefits package helps
you recruit and retain valuable employees.
We help our clients tailor a program that
will fulfill both the employers' and employees' needs.
Please call an HCI consultant at 713-626-2838 or use our Contact Form.
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