Monday, April 19, 2010

Fixed Index Annuities - An Overview

Assorted international currency notes.Image via Wikipedia

What is an annuity?
An annuity is a series of payments made over a period of time.

What are Fixed Index Annuities?
FIAs are very important wealth managing instruments that provide earning potential while keeping principal safe from market fluctuation. Your money invested in a Fixed Indexed Annuity (FIA) won 't be affected by market losses.

What are the advantages of FIAs?
And here a few of advantages that annuities may bring to your retirement portfolio...

Estate Planning: Proceeds from annuities pass straight to your beneficiaries with no delay, expense, and publicity of probate. Many states allow that. If you have ever had a loved one's estate move through probate (a tedious legal process), you’ll realize just what a great benefit this can really be.

Tax Deferral: Because you don't pay taxes on earnings each year, your annuity can continue to work harder because of the power of tax-deferral. Of course, you will have to pay income taxes on earnings when you withdraw your annuity's gains, but at least you can decide when that happens.

No Contribution Limits: While contributions to other retirement savings vehicles, like 401(k)s and Individual Retirement Accounts, are strictly limited, annuities offer tremendous flexibility. You could contribute up to the limits imposed by the insurer and thus reap some benefits of tax-deferral. In addition, you can add more dollars to your annuity contract anytime.
Flexible Payment Options: Unlike 401(k)s and IRAs, which mandates that you start making withdrawals at age 70 1/2, you just might wait much longer with annuities. If and when you do choose to commence receiving payments, you'll be able to choose among the following methods:

1. Lump Sum distribution (that is, if you opt to receive one single-time payment)
2. Periodic distributions (you may take money only as it's needed)
3. Systematic distributions (a fixed or variable amount is paid you at regular fixed intervals)
4. Annuitization (when time comes for you to start cashing in, you may choose a fixed or variable payments, which are guaranteed for the rest your lifetime)
Tax Control: The money invested your annuity consists of two parts: (1) principal and (2) earnings. Assuming your annuity was opened with after-tax dollars, you're only taxed on the earnings.

Under annuitization, each payment is made up of both principal and interest, spreading your tax liability evenly among payments. Through these distribution options, you have complete control over will pay taxes on the earnings.

Although annuities may not be all perfect when it comes to tax control, at least you have some control within the options. Should you should die while your annuity is accumulating, all deferred taxes on the growth will become due, reducing your annuity's value.

Easy To start out and maintain: Usually all is needed to get started is a simple application, a check, plus your signature. That’s all. And, what is good news is that by the end of every year, you won't receive a 1099 for income earned in your annuity contract. That's one less thing to bother with on tax day, April 15th.

Annuities are easy to establish and often include a "free look period." Your state of residence or even the annuity agreement will define a period of time (usually 30 days) where can cancel your contract should you decide it isn't really right for you.
A final word of advice: Do not attempt to do this on your own. Consult with a competent financial adviser, who has some expertise in FIA—fixed index annuities

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