Annuities can provide an excellent investment opportunity for a variety of investors, both big and small. Yet, first time annuity shoppers can have any number of essential questions that should be answered before purchasing an annuity.
What is an Annuity?
An annuity is a contract that is purchased and made between the investor and usually an insurance company for a promise to repay that money in the future, beginning at a specific and predetermined date and for a specific period of time. The investor can deposit funds into that account, during what is known as the accumulation phase, of which that account can grow at predetermined rate; or at a variable or indexed rate. Annuities can defer taxes on the growth of that account until the investors chooses to make a withdrawal many years later.
What is the Difference Between an Annuity and CD?
Fixed rate annuities and Certificates of Deposits (CDs) are often compared because they both offer a “fixed” rate of return which is predictable and predetermined for a specific period of time. The difference really stops there. Annuities are a much deeper or “richer” investment tools and can provide any number of benefits which are not offered by a CD. Fixed rate annuities can provide a higher level of return through higher fixed interest rates, as well as provide a viable tax shelter for any growth that would occur in the account until it has matured. Any growth on that CD account would be taxed every year. In addition, annuities can also provide a fixed stream of income payment to the investor depending on his level of financial need. Offered by banking institutions, CDs are backed by the FDIC. Annuities however remain as solvent as the issuing insurance company though the industry and independent states offer various investor protections.
What Benefits do I get from an Annuity?
Annuities provide the benefits of tax free growth, deferred income streams, and flexibility with vested funds by which to invest in that caters to the investor’s aversion and tolerance to risk based on his age and financial needs. There are various annuities that may appeal to each investor differently. For example, a fixed annuity can provide a predictable level of growth, say at 4% per year, whereas an indexed annuity can provide growth that generally pegged to the overall market in general. Variable annuities can allow the investor to place his or her money in several mutual funds, which can weighted to the investor’s comfort and balance of growth.
Are there Penalties for Withdrawing Funds from an Annuity?
As investment instruments, annuities provide tax free growth and defer tax on income until the investor makes his or her first withdraw. If an investor over the age of 59.5 withdraws funds, he or she will not incur any early withdraw penalties. However, investors who are younger than 59.5 years of age and takes money of their account will be subjected to a 10% penalty and have to pay taxes on any growth in that money.
Is My Money Safe in an Annuity?
Annuities are safe and stable investments offered by insurance companies. Like any investment there is always a level of risk, but annuities have maintained a strong reputation for stability and low risk instruments. Unlike a traditional bank savings account, an annuity is not backed by the FDIC as annuities are issued by insurance companies and not banks. To assist with risk management, many states have their own “back up” organizations that can step in and help the investor if it was necessary. In addition, the industry recognizes the risk for investors and has set a precedence that other insurance companies would buy up the contracts from an insolvent company, if necessary.