Annuities are a unique financial product that, along with Social Security, employer pensions, your 401(k) plan, IRA and other assets, can enhance your retirement security.

An annuity is a contract between you (the purchaser or owner) and the issuer (usually an insurance company). In its simplest form, you pay money to the annuity issuer, the issuer invests the money for you, and then the issuer pays you back principal and earnings over a specified period of time or for your lifetime.

There are many categories of annuities. They can be classified by:

• Primary purpose - accumulation or pay-out (deferred or immediate)
• Nature of pay-out commitment - fixed period, fixed amount, or lifetime
• Tax status - qualified or nonqualified
• Premium payment arrangement - single premium or flexible premium

An annuity can be classified in several of these categories at once. For example, you might buy a non-qualified single premium deferred fixed annuity.

Features of Annuities

In general, annuities have the following attractive features:

Tax deferral on investment earnings

Interest earnings on CD’s, savings accounts, etc. are taxed year by year, but the interest earnings in annuities are not taxable until you withdraw money. This tax deferral is also true of 401(k)s and IRAs; however, unlike these products, there are no limits on the amount you can put into an annuity. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs.

 

Protection from creditors

If you own an immediate annuity (that is, you are receiving money from an insurance company), generally the most that creditors can access is the payments as they're made, since the money you gave the insurance company now belongs to the company. Some state statutes and court decisions also protect some or all of the payments from those annuities. And your money in tax-favored retirement plans, such as IRAs and 401(k)s, are generally protected, whether invested in an annuity or not.

Lifetime income

A lifetime immediate annuity converts your deposit into a stream of payments that last as long as you do. In concept, the payments come from three "pockets": Your deposit, the earnings on your deposit and money from a pool of people in your group who do not live as long as actuarial tables forecast. It's the pooling that's unique to annuities, and it's what enables annuity companies to be able to guarantee you a lifetime income.

Contact DelVal Senior Advisors to learn more about annuities.

 

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