Annuities

NOTE: Annuities are not suitable for everyone and for all situations. Careful review of the terms of the annuity contract and an open and frank discussion of your plans and needs is essential to determining suitability. We never advocate placing a very significant portion of one’s retirement nest egg into annuity contracts. However, properly used, annuities can add safety and income options to a well-balanced retirement plan.

Annuities are long-term contracts in most cases, and therefore, funds which may be needed in the near-term should not be placed in most annuity contracts, as penalties for early withdrawal in the form of surrender charges can be substantial.

What Are Annuities?

Annuities play a very important role in retirement planning, enabling you to save money and taxes while eliminating the fear that you will outlive your savings. Basically an annuity is an investment contract or policy between you and an insurance company. There are many kinds of annuities – some tailored for income, some for future growth, and some as savings vehicles depending on your exact income and investment needs.

Annuities come in two different basic types: an immediate annuity and a tax-deferred annuity. With immediate annuities, you give a lump sum of money to the insurance company. Based on your age, life expectancy, and interest rates, the insurance company calculates how much they’ll send you each month – no matter how long you live.

For tax-deferred annuities, typically you give the insurance company a lump sum of money, and it grows on a tax-deferred basis. Tax deferred annuities can be great because you don’t pay any taxes on the earning or profits that are built up in the annuity until you take the money out. You can also add money to your tax-deferred annuity in various amounts over time, providing you with more flexibility for your investment portfolio.

Are They Right For You?

For many people, annuities are a great investment as you can invest unlimited funds on a tax-deferred basis. A number of features can also be custom tailored to ensure your annuity is perfectly suited for your personal income requirements. Some of the advantages of having an annuity are:

Safety – Annuities are the safest way to guarantee an income for life.

Taxes – Annuities are tax-deferred instruments which can significantly increase returns

Yield – Annuities offer a variety of options which can maximize yield combined with safety

Liquidity – Many annuities now have very attractive liquidity options that avoid surrender charges

Estate – Annuities can avoid probate and pay immediate benefits to beneficiaries *

Annuities free you from the responsibility of money management and the headache of making your own investment decisions.

The advantage of tax deferral is that money you would otherwise pay in taxes every year is allowed to remain in your account, earning additional interest and creating further gains.

TYPES AND USES OF ANNUITIES

Single Premium Deferred Annuity

A single premium deferred annuity, or SPDA, is an annuity you purchase with a single payment. You get a guaranteed interest rate for a specified period of time, and the taxes on the interest you earn are deferred until you make a withdrawal. Single Premium Deferred Annuities are ideal for anyone who wants to let their money grow risk-free while deferring income taxes, with the goal of creating income later in life.

Immediate Annuity

An immediate annuity guarantees the holder a fixed monthly income that starts as soon as the investment is made. The income then continues for the rest of your life, with the amount set based on the size of your investment, your age, current interest rates, and the maximum time you have chosen for the company to pay out – even if you were to die. If you hold an immediate annuity outside a retirement account, part of each monthly payment is considered a return of principal, so that portion of the income is not taxed. The return of principal along with interest your funds are generating causes a higher monthly payment than you could probably get elsewhere on a guaranteed basis.

Split Annuities

A split annuity is a very tax efficient and intelligent investment vehicle combining two different types of annuities – a single premium deferred annuity and a single premium immediate annuity. One annuity repays you a set sum of money each and every month over a specified period of time. The other annuity is left in place to grow on a fixed interest basis, with the goal being that by the time funds in your immediate annuity are depleted, the single premium deferred annuity will be restored to your original starting principal. This allows you to then restart the process with new prevailing interest rates.

Equity Indexed Annuity

Equity Indexed Annuities were established in the mid-1990’s by insurance companies to compete with very popular indexed mutual funds. The index annuity tracks a particular stock-market index, such as the S&P 500, NASDAQ, or DOW, with the rate of return usually being a set percentage of the increase that index shows in a given year. This is a very attractive annuity for many investors because the principal investment is protected and guaranteed from losses in the equity market, while gains add to the annuity’s return.

However, because the terms and conditions vary widely between different contracts, caution should be exercised in determining the exact conditions, benefits, possible drawbacks, and payment options and costs (the “spread” between the index rate of growth and the paid rate of growth does constitute a continuing cost). Read all disclosure documents carefully and be sure to have an open and frank discussion with your financial advisor/agent.

Individual Retirement Account (IRA)

An IRA is a tax-advantaged personal savings plan that lets an individual set aside money for retirement. All or part of the participant’s contributions may be tax deductible, depending on the type of IRA chosen and the investor’s personal financial circumstances. Distributions from many employer-sponsored retirement plans may be eligible to be rolled into an IRA to continue tax-deferred growth until the funds are needed. In the year 2008, you can contribute up to $5000 to your IRA.

Roth IRA

With a Roth IRA, you may not deduct your contribution, but your contributions can grow income tax-free. When you withdraw money from a Roth IRA at retirement, you will not owe any taxes on that money, no matter how much the money has grown in value, provided you have followed IRS guidelines. In addition, you can withdraw your own contributions at any time without penalties or taxes, regardless of your age and how long the money has been in the Roth IRA. Any gains or earnings however must stay in the Roth IRA until you have turned 59 ½ and you’ve held your account for more than five years before you can withdraw them without tax liability. A Roth IRA allows you to amass a lot over the long term in exchange for not taking a tax deduction now. Plus you do not have to begin taking withdrawals at age 70 ½ as you do with traditional IRAs.

Variable Annuity

With billions of investment dollars going into mutual funds, insurance companies created a competing product called Variable Annuities that allows you to invest your money within investment portfolios called subaccounts. Unlike other annuities, a variable annuity does not guarantee a set rate of interest or earnings, being based instead off fund performance and account averages. However you can buy, sell and switch funds at any time without incurring taxes until you begin to withdraw your original investment and income after age 59 ½. At that time your gains are taxed as ordinary income.

As with indexed annuities, care should be used in reading all disclosure documents prior to entering this form of annuity. In most cases, a mutual fund will serve the same purpose and may have lower costs and greater control for the investor.

WE DO NOT CURRENTLY OFFER VARIABLE ANNUITIES

* All decisions on using annuities to bypass probate should be made in consultation with your estate attorney, as this use may bypass express provisions in testamentary documents. For example, if you have specified provisions in your will to provide money for your children over time but the annuity simply lists the children as beneficiaries and does not name the trust created by your will, the money may go to your children much earlier than planned.