The Different Types Of Annuities: Deferred, Immediate, Fixed, Variable, And Index"
When you hear about deferred annuities and immediate annuities, you may not realize that these can be several different types of products, such as variable annuities, fixed annuities or indexed annuities. The difference is that a deferred annuity defers payment to a later date. The immediate annuity starts payments the first month after the contribution to the product.
Most people find their head swimming when faced with all the possible choices in annuity products. Often they don't know the features of each type of product, nor do they have any idea what to look for or which one is best for their situation.
All annuities have one feature that makes them a desirable product. The feature is the tax deferral of growth. However, it is also a benefit with disadvantages. Just like the a IRA that allows tax-deferred growth, there's a penalty if you remove the funds before you're 59 . Annuities don't receive a tax deduction, so the part that receives not only taxation, but also a penalty for early withdrawal is the interest. On annuities, the tax-law reads that the last in is the first out. Since the last in is always interest, you'd pay the 10 percent penalty plus the taxes on the interest.
Fixed annuities are similar to a bank CD. You receive a specific interest rate for a guaranteed period and then the interest rate, just like the CD rate, adjusts to the latest rate for the next lock in period. However, unlike the CD, the fixed annuity also has a guaranteed minimum where they'll never pay less than that interest rate.
Variable annuities allow the owner to participate in the returns by offering a selection of mutual funds on the interior. One of the major benefits you receive with this type of annuity is tax savings, not only on the growth, but also on the interior trades. In order to have a balanced account or take advantage of a market trend with mutual funds, you periodically have to readjust the way you invest your money. That means a sell off and repurchase. If you made a profit, regardless of whether you reinvest the funds, you pay taxes on any growth. Since the growth occurs under a tax shelter, there's no taxation until you remove the funds.
Another benefit of the variable annuity over mutual funds is the large group of funds from which to choose. Most people, in order to reduce the load, use one family of funds. In annuities, you have the best of the best and there's cost for switching from one company's funds to another.
Variable annuities also contain some additional features you can add to the product for a price. One of these for those people faint of heart is a guaranteed return. While the products vary with different stipulations, most of the time companies offer a five percent guarantee when they offer this benefit.
Index annuities are a cross between the fixed annuity and the variable. While it often carries a slightly lower rate than the fixed annuity, it does offer the potential growth that comes from investing in the market.
If the stock market rises, then you get a percentage of the indexed growth. If the market drops however, you don't lose but get the fixed interest rate promised. While you don't receive the total amount of growth that the market experiences, it still helps fight the risk of inflation. Of course, the guarantee protects you from market risk.
Most people find their head swimming when faced with all the possible choices in annuity products. Often they don't know the features of each type of product, nor do they have any idea what to look for or which one is best for their situation.
All annuities have one feature that makes them a desirable product. The feature is the tax deferral of growth. However, it is also a benefit with disadvantages. Just like the a IRA that allows tax-deferred growth, there's a penalty if you remove the funds before you're 59 . Annuities don't receive a tax deduction, so the part that receives not only taxation, but also a penalty for early withdrawal is the interest. On annuities, the tax-law reads that the last in is the first out. Since the last in is always interest, you'd pay the 10 percent penalty plus the taxes on the interest.
Fixed annuities are similar to a bank CD. You receive a specific interest rate for a guaranteed period and then the interest rate, just like the CD rate, adjusts to the latest rate for the next lock in period. However, unlike the CD, the fixed annuity also has a guaranteed minimum where they'll never pay less than that interest rate.
Variable annuities allow the owner to participate in the returns by offering a selection of mutual funds on the interior. One of the major benefits you receive with this type of annuity is tax savings, not only on the growth, but also on the interior trades. In order to have a balanced account or take advantage of a market trend with mutual funds, you periodically have to readjust the way you invest your money. That means a sell off and repurchase. If you made a profit, regardless of whether you reinvest the funds, you pay taxes on any growth. Since the growth occurs under a tax shelter, there's no taxation until you remove the funds.
Another benefit of the variable annuity over mutual funds is the large group of funds from which to choose. Most people, in order to reduce the load, use one family of funds. In annuities, you have the best of the best and there's cost for switching from one company's funds to another.
Variable annuities also contain some additional features you can add to the product for a price. One of these for those people faint of heart is a guaranteed return. While the products vary with different stipulations, most of the time companies offer a five percent guarantee when they offer this benefit.
Index annuities are a cross between the fixed annuity and the variable. While it often carries a slightly lower rate than the fixed annuity, it does offer the potential growth that comes from investing in the market.
If the stock market rises, then you get a percentage of the indexed growth. If the market drops however, you don't lose but get the fixed interest rate promised. While you don't receive the total amount of growth that the market experiences, it still helps fight the risk of inflation. Of course, the guarantee protects you from market risk.
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