As we’ve discussed before, annuities can be fantastic resources for retirement. Many individuals and couples opt to use them in place of other retirement saving accounts in order to better budget their retirement funds. This can be an extremely effective way to finance during the later stages of life.
Annuities became popular during the Great Depression, when people worried about how the volatility of the stock market could impact their retirement funds. Today, with similar concerns – as well as a continual decrease in pension opportunities – it’s not surprising that annuities are gaining popularity.
Of course, like all types of investments, annuities can be tricky to decipher without a financial planner. That’s why we have assembled five annuity questions and answers to help you make educated decisions about your financial future.
1. What Are The Types Of Annuities?
The two main types of annuities are deferred and immediate annuities. Deferred annuities gain funding for a while before they begin to pay out. Immediate annuities begin to send you payments soon after you begin to pay into the account.
Within these categories there are fixed and variable. Fixed annuities include a preset amount of income. Variable annuity payments are based on how well your account investments do, so they can change.
2. How Much Can I Contribute To My Annuity Annually?
Most investment accounts, such as IRAs and 401(k)s, have annual contribution limits. Annuities, on the other hand, do not have a contribution limit. This makes them extremely beneficial if your annual contribution to your retirement fund exceeds the limits for other types of accounts.
3. How Are Annuities Taxed?
The tax process on annuities can be a bit complex. One of the benefits of annuity is that they are taxed as regular income when you begin to withdraw from them, which is fairly familiar to most people. Where it gets complicated is when you fall below the total premium sum that you contributed, the amount is usually not taxed at all. Having a financial adviser to oversee your annuity tax process is always a good idea.
4. What If I Need My Annuity Funds Early?
Unfortunately, early annuity withdrawal comes with a 10% penalty. This can be a significant amount of money, especially since you have likely been contributing to this account for most of your life. It is best to contribute money that you know you will not need until you reach 59.5 years of age.
5. How Are Annuities Different Than Other Retirement Accounts?
When explaining annuities versus other retirement accounts, the main difference is how you withdraw the money. With other accounts, you can take out the money as you would like to. With an annuity, you are receiving the money in payments that are similar to an income structure. This means that it’s more difficult to spend large amounts of your annuity account at once.
For wealth planning, estate planning, and annuity advice you can trust, Trajan Wealth is here for you. With decades of experience in the industry, we can help you create a retirement lifestyle that works for your needs. Take a closer look at our annuities services page and download our free Annuities Unmasked ebook to see how our team can help you plan for your future—no matter how far away it is!