Is An Annuity Right For My Retirement?Annuities, Explained Before You Buy One.
Fixed and fixed indexed annuities can turn savings into income or let it grow tax-deferred. Maartin explains the costs, the surrender years and the guarantees in plain English before you sign anything.
The Short Answer
An annuity is a contract with an insurance company. You pay a premium, and the insurer pays income for life or a set period, or lets the money grow tax-deferred. Deferred annuities usually charge a surrender fee for early withdrawals, and every guarantee depends on the insurer’s claims-paying ability.
Source: California Department of Insurance
Three Numbers Worth Knowing
- 30 Days
- California gives seniors 30 days to review a new annuity contract and return it for a full refund.
- 59½
- Take money from a deferred annuity before this age and the IRS generally adds a 10% tax.
- 7 To 8 Years
- How long surrender fees usually apply to a policy or annuity, according to California’s Department of Insurance.
Source: California Department of Insurance and IRS.gov
Two Kinds Of Fixed Annuity
Fixed Or Fixed Indexed: How Each Earns Interest.
Both are insurance contracts with a minimum guarantee written in. They differ in how interest is credited.
| Question | Fixed AnnuityA Rate Set By The Insurer | Fixed Indexed AnnuityInterest Linked To A Market Index |
|---|---|---|
| How Interest Is Set | The insurer sets the rate, which may be locked for one year or as long as 10 years. | Interest is usually based on a stock market index, using a formula written into the contract. |
| Minimum Rate | The contract states a guaranteed minimum interest rate. | Some set the minimum at 0%, so a year can credit nothing. |
| First-Year Rates | Watch for a higher first-year “teaser” rate that drops afterward. | Ask how the crediting formula can change after the first contract year. |
| Surrender Charges | Usually apply if you take out more than the contract allows during the early years. | Usually apply if you take out more than the contract allows during the early years. |
| Who Backs It | The issuing insurance company and its claims-paying ability. | The issuing insurance company and its claims-paying ability. |
Variable annuities are securities, sold by registered representatives; Maartin works with fixed and fixed indexed annuities.
Before You Sign
Four Questions To Ask About Any Annuity.
California’s Department of Insurance urges buyers to ask questions like these. Maartin answers each one before you decide.
How Long Is The Surrender Period?
Ask for every deadline and the charge for each year. A surrender charge can leave you with less money than you started with.
How Much Can I Take Out Each Year?
Ask how much you can withdraw without a surrender charge, and from which year, before you ever need it.
What Does My Beneficiary Receive?
Find out what your family gets if you die before income starts, and whether a surrender charge comes out of it.
Will I Still Have An Emergency Fund?
The Department of Insurance says that if paying for an annuity leaves you without an emergency fund, an annuity is probably wrong for you.
Working With Maartin
How An Annuity Review Works.
- 01
Start With The Job
Income for life, tax-deferred growth or income for a surviving spouse. The job the money has to do decides the type.
- 02
Check The Fit
California law requires the agent to ask about your finances, and an annuity can be sold only when it suits your needs and circumstances.
- 03
Compare Contracts Side By Side
Surrender schedule, free withdrawal amount, minimum rate, income options and death benefit, laid out in plain English.
- 04
Use Your 30 Days
If you are a senior, California gives you 30 days after you receive the contract to review it and return it for a full refund.
Taxes are your CPA’s call, and Maartin works alongside them.
When One May Fit
Signs An Annuity Belongs In Your Plan.
An annuity is a long-term contract. These are the situations where one usually earns a closer look.
- You Want A Paycheck For LifeA life or joint and survivor payout keeps income arriving as long as you, or you and a spouse, live.
- Your Basic Bills Need More Lifetime IncomeSocial Security and any pension leave a gap under housing, food and health care. See retirement income planning.
- You Have Money To Leave Alone For YearsDeferred annuities suit money you can set aside through the surrender period, with your emergency fund kept outside.
- You Want Tax Deferral Outside Your IRATaxes on a deferred annuity’s growth wait until you take the money out.
- You Want To Protect A Spouse’s IncomeA joint and survivor payout keeps paying the surviving spouse a portion of the income for life.
Questions
Common Questions
Can I lose money in a fixed or fixed indexed annuity?
The contract states what is guaranteed. Surrender charges and fees can leave you with less than you paid in if you take money out early, and every guarantee depends on the issuing insurer’s claims-paying ability. Maartin walks through those numbers before you buy.
What is a surrender charge?
A fee the insurer charges if you take out more than the contract allows during the surrender period. California’s Department of Insurance says these fees usually apply in the first seven or eight years. Each contract sets its own schedule, so read it before you sign.
How are annuities taxed?
Taxes on a deferred annuity’s growth wait until you take money out, and income payments are taxed as regular income. If you bought the annuity with after-tax money, only the interest is taxed. Withdrawals before 59½ generally add a 10% IRS tax, so check with your CPA first.
Can I change my mind after I buy?
Yes, within the free look period. If you are a senior, California gives you 30 days from the day you receive the contract to return it for a full refund. After that, cancelling can trigger a surrender charge.
Should I replace an annuity I already own?
Compare first. A replacement can start a new surrender period and new fees, and California requires a full disclosure of the benefits and possible drawbacks before you switch. Maartin shows you both sides on paper.
Can I hold an annuity inside my IRA?
Yes. Because the IRA already defers taxes, an annuity earns its place there through lifetime income and its guarantees, which rest on the insurer’s claims-paying ability. See 401(k) and IRA rollovers, and read how annuities create income.
Considering An Annuity?
Know The Terms
Before You Sign.
Bring any annuity offer you’re weighing, and Maartin will walk through its costs, surrender years and guarantees with you.
Book An Annuity ReviewRead The Questions Families Ask FirstVisit The Office On Arlington Avenue