 In
this article we describe the different types of annuities and summarize the features
that make each type unique.
What
are the different types of Annuities?
Annuities
are classified as either immediate or deferred. Immediate
Annuity
An immediate annuity allows
the annuitant to purchase and contribute to an annuity and then to begin annuitizing
immediately. An immediate annuity will discontinue at the annuitant's death. Keep
in mind that there is no accumulation phase and therefore, no tax-deferred growth
on earnings. An example: Deferred
Annuities
Deferred annuities allow for payouts to begin sometime in the
future, therefore allowing tax-deferred growth on earnings. The main types of
deferred annuities are as follows: -
Fixed
Annuity: A fixed annuity guarantees fixed or pre-determined payments for a
specific period, or for life, beginning at some future time. It is invested in
fixed-income securities and cash. The insurer takes on both the investment risk
and the mortality risk. Investment risk is the risk that the earnings in the annuity
will not be enough to provide for the predetermined fixed payout. The mortality
risk is the risk that the annuitant lives too long, i.e., the payments need to
continue even when the money in the account has been depleted. These annuities
guarantee a fixed interest rate for a specified period of time. -
Variable Annuity: Like
a fixed annuity, a variable annuity defers taxes until withdrawal, or the annuity
period; however, the money is invested in what is referred to as a separate (or
sub) account that is selected by the investor. Sub-accounts consist of mutual
funds, or an investment portfolio managed by investment managers. The value of
the sub account will fluctuate with the performance of the underlying securities
in the portfolio. Therefore, the payouts will not be fixed, but rather will be
variable based on performance and growth of the separate account. The payout amount
will always continue to depend on the performance of the portfolio. With a variable
annuity, the investor takes on the investment risk since the performance of the
securities in the portfolio is not guaranteed; however, income is guaranteed for
life. Some examples of variable annuities are: -
Periodic
Payment Deferred: Allows the annuitant to make a series of payments into the
annuity during the accumulation phase until the payout phase. This allows for
earnings to accrue tax-deferred. -
Single
Payment Deferred: Allows the annuitant to make a lump-sum contribution to
the annuity. This lump-sum will remain in the account and earnings will accrue
tax-deferred until the payout phase. Another
type of annuity that needs to be mentioned is a Tax Sheltered Annuity. Tax
Sheltered Annuities
A tax-sheltered annuity (TSA) is a way for educators
of public educational institutions and some nonprofit organizations to shelter
and accumulate funds for retirement through payroll deduction. A TSA is also known
as a 403(b). Some main characteristics of a TSA are as follows:
-
Each payroll deduction,
or contribution, into a TSA reduces your federal taxable income. -
Depending on the state, your
state taxable income may also be reduced. -
Interest and capital gains are tax-deferred until you begin withdrawals. -
Social security and pension
benefits are not affected by TSA benefits. -
You
may contribute up to $15,500 in elective deferrals for 2008, with a $5,000 "catch-up"
provision for those over age 50. For those with 15 years of service, there is an additional $3,000 service catch-up.
-
You own and control all of the assets in your TSA. Generally, TSA's are fixed
annuities or equity index annuities, and are guaranteed to earn a minimum interest
rate. -
You may change your beneficiary at any time, and upon your death, your beneficiary
will receive the TSA. -
As
compared with other annuities, TSA's have less fees and in some cases no surrender
charges. -
With TSA's there are no matching contributions. Because of this, we generally
recommend to contribute to an IRA first and then to a TSA. -
You may withdraw from a TSA
for a car, a child's education, or other types of loans. The borrowed money is
tax-free, but you do have to repay the loan over a certain period of time. -
If you change employers, you
may transfer, or continue the plan with the new employer (if eligible), leave
the TSA as-is until retirement, or you may annuitize and begin receiving payments
(of course, subject to early withdrawal penalties and fees).
For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products and this overview is not to be construed as an offer to purchase any insurance products.
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