What Should You Know About Fixed Annuities Investments?

Fixed annuities investments basically are akin to CD investments that are issued by insurance firms. As is the case with CDs, they assure guaranteed fixed annuity rates of interest, which, in many cases exceed that of bank CDs.

Fixed annuities investments are unique in that they can be “immediate or deferred”.

When should you consider fixed annuities investments?

  • When you want the peace of mind of a guaranteed lifetime income
  • When you want the flexibility of getting income now or in future
  • When you are eyeing an investment or fixed annuities investments that are easily integrated into your income strategy.

Read more on Structured Settlement Investments

Types of Fixed Annuities

Let’s see the types of fixed annuities. The deferred type of fixed annuities tends to accumulate fixed rates of interest whereas the immediate kind make regular payments and is based on your age as well as size of annuity – during the retirement phase.

The most important thing is that a “fixed annuity can give you retirement income”. The predictability as well as convenience of a fixed payout makes fixed annuity a much-deployed option for people (mainly retirees) who wish to supplements their retirement income with a steady flow of income.

Basic Terms for Fixed Annuities

Apart from the expected benefits of tax postponement, your preferred payment options of variable annuity investments and exemption from creditors as well as probate, fixed annuities typically pay higher rates of interest as opposed to CDs or other conventional guaranteed instruments. Resultantly, interested investors explore these contracts to attain a slightly higher rate of growth and checking what are the best annuity rates and how to cash out an annuity.

Some key facts and fixed annuity investment risk

  • Fixed annuities typically mature anywhere between a period of one year to ten years
  • In majority of the cases, fixed annuities automatically get renewed at a revised interest rate unless the money is moved or withdrawn
  • The rate of return will be predicated on existing interest rates and will be reset upon the maturity of the annuity
  • Some contracts entail a “teaser rate,” which basically means a higher rate which is valid only till the first year of the term.
  • In other cases, you will initially get a lower rate when purchasing fixed annuity but it will then increase by a fixed amount each year until their maturity.

As is the case with all types of annuities, fixed annuity investments typically contain a schedule of reducing surrender charges, which typically vary between 7% and 15% – and is higher than the 10% early distribution penalty imposed by the IRS. This charge declines gradually by a few percentages annually.

For instance, a 10-year fixed annuity fidelity term may impose a penalty of 10% for any funds taken out within one year of buying the contract, 9% for the money withdrawn in the next year and goes on until the completion of the surrender charge schedule.

However, many contracts in fixed annuity allow you to withdraw anywhere between 10% and 20% of the contract’s value annually with no penalty, offering some liquidity.

Meanwhile accumulation units are bought with all the payments made into the deal. These units then accumulate and thrive within the contract until it gets annuitized. “Annuitization denotes a one-time event which occurs in all annuity contracts”

These accumulation units get converted into annuity units after which, the contract starts making payments in one form or another to the beneficiary.

Annuity Taxation

The money that you put into a fixed income annuity accumulates “tax-deferred” until the distributions start getting taken, provided you do not withdraw the money before turning 59.5.

Once you begin to collect the money, computing annuity payment calculator, the IRS will tax the payments in the same manner that they would tax any other income. This tax rate is calculated using a formula known as exclusion ratio which separates taxable income from tax-free income. Although you will get your principal back tax-free, the growth and income will remain taxable.

For instance, if you put in USD 200,000 into a fixed contract and double it to USD 400,000 and you get monthly payments of USD 600-700, the exclusion ratio specifies that 50% of each payment of USD 350 will now be regarded as a tax-free return of the principal amount.