Things To Consider When Choosing the Best Fixed Annuities

Most people have heard of fixed annuities. Often they won’t try them because they’re afraid they’ll lose money. Their fear stems from lack of information on a fixed annuity. A fixed annuity is very similar to a CD at a bank but has additional features that make it far more attractive. Just like a bank, you have guarantees on interest rates.

There are two different ways to used fixed annuities. The first is an immediate annuity. In this case, you take smaller equal payments over a set period. The time may be your lifetime, the lifetime of your spouse and yourself, a specific number of years or you can request a specific payment amount and let the company tell you how many payments it lasts. A deferred annuity does just as the name implies, defers the payment to a later date.

While the tax-free growth of interest is a real plus over the taxable interest of the CD, there are some precautions you need to take. If you’re under the age of 59 and take any money from your fixed annuity, you’ll find the IRS imposes penalties. An annuity is a retirement vehicle and just like any retirement account, you pay a10 percent penalty on the growth if you take money before 59 . That is, of course, unless you take substantially equal periodic payments that last until that age or at least 5 years. Then the IRS approves it with no penalty.

Annuities also have penalties imposed by the companies. These are surrender charges. A surrender charge is a percentage that normally decreases the longer you hold the annuity. They often start between ten and four percent with the percentage decreasing over a five to ten year period. However, some contracts may have as high as a fifteen percent surrender charge that never goes away unless you annuitize the payment.

If you worry that you may need the funds for an emergency, look for annuities that offer a ten percent withdrawal right that accumulates. Some companies off the right every year but if you don’t take the money, you lose that particular ten percent right of removal. Others offer as little as ten percent in the lifetime of a contract. Read all the information and get annuity quotes to help you make your final decision.

Annuity taxation occurs in two ways. If you remove the money from a fixed annuity in a lump sum as a withdrawal, the government taxes it with LIFO rules. This means, last in, first out. Since the last in is always interest, you pay taxes on the interest you withdraw. Unlike a CD, where even if you reinvest the money, you still pay taxes, you only have taxation of annuity interest once you remove it.

Immediate annuities have different tax rules. If you use the fixed annuity as a deferred annuity and then annuitize it later, it follows these rules also. Part of the payment each year is principal and part of it is interest, according to the IRS regulations.

The exclusion ratio, the amount you exclude from taxation on payments from fixed annuities, comes from multiplying the expected payment by your life expectancy and dividing the original premium by that number. A 62-year-old person’s life expectancy is 22.5 years. If they receive an annual amount from a fixed annuity of $9000 and live the 22.5 years, they’ll make $202,500 in payments. Simply divide the $100,000 invested by $202,500 to get an exclusion ratio of 49.4 percent. Therefore, you only pay tax on 50.6 percent of the payment.

Because of the favorable tax treatment, high interest rates and secure feeling of never running out of money, many people choose to take payments from the fixed annuity. Some, divide their funds into several different vehicles but use fixed annuities as their base monthly income in addition to social security. They request the insurance company deposit the funds directly into their account just like their social security. By doing this and keeping other investments for appreciation value and emergencies, they always know they’ll have money for monthly needs such as food, shelter and utilities.

John C. Ryan authors about annuity insurance, and advises how to find the best annuity for you. Want to learn more?? Visit us, for more information on fixed annuities .