Annuities exist as contracts between you and your insurer. These allow for a stable, consistent flow of income for added financial security when you retire. They come in such varieties as fixed, variable, indexed, fixed indexed, and immediate. Annuities all follow the same principle, but are different in how they build and how they’re disbursed. Each type has its own advantages.
How Do You Get An Annuity?
When you make a contract, you can make your first payment toward an annuity plan in one of two ways: make the payment one of many payments you’ll make throughout the time you hold your policy, or you can pay a large lump sum upfront.
Many choose to make a series of payments to obtain policies, but lump sum payments are more common with some types of plans, such as immediate annuities.
What Determines How Funds Build?
The type of annuity you choose directly impacts the rate at which your account builds. Some policies allow accounts to gain interest every year, which is a fixed rate and is the most conservative choice. These are known as fixed annuities.
Others, like variable annuities and indexed annuities, rely on market performance. An account that builds funds this way poses the greatest risk, but offers the highest rewards.
Fixed index annuities are the middle ground – there are guaranteed returns, with some added benefits in times when the market is doing well.
When Will I Receive Payments?
How long your policy’s surrender period lasts depends on the policy contract itself. Many annuity policies have surrender periods between three and 10 years, but surrender periods can be upwards of 15 to 20 years. Making withdrawals during this time will result in surrender fees.
If you choose an immediate annuity, the payments begin within 30 days after you sign up. There is no surrender period.
Plans disburse regular payments at different rates. You can choose to be paid monthly, quarterly, or annually. Some plans may even allow you to take everything at once.
Once the surrender period is complete, you also have the option to renew your annuity policy or move your funds into another annuity plan.
How Do Taxes Work With Annuities?
You do not have to pay any taxes as your account builds in value. What you build does not count as income. However, your funds become taxable as soon as you withdraw them. How those funds are taxed depends on how you paid for your policy.
If you paid with qualified funds, which come from tax-deferred accounts such as IRAs, you pay taxes on the principal plus the interest. With non-qualified funds, you pay taxes on the interest alone.
Build Toward a Bigger Retirement Income Today!
Annuities are a way to turn your hard-earned income into an easy, stable, and consistent flow of income that will help you maintain peace of mind as you enter your later years. At Coastal Insurance Planning, we can get you a plan that builds just the way you want it to, with funds disbursed on a payment schedule of your choice.