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"CD Alternatives"

"CD Alternatives" | IRA's | Mutual Funds

Most Common Usage
Long considered a �CD alternative�, annuities have become very popular today. Paying higher rates than CD's and deferring taxes, many people on a fixed income find annuities are a better option than tying up money in CD's or letting it warehouse in a money market account. Like a CD, you can place lump sums of money in annuities. You must leave the money in the annuity for a period of years, usually between 2 and 5 years. The longer you leave the money in, the higher your interest rate will be. Depending on the annuity purchased, a yearly amount is allowed to be withdrawn without a penalty. This amount is usually around 10%.
There are other annuity options, such as fixed annuities and even equity-indexed annuities. These other options are explained below.

Definition: What Is an Annuity?
An annuity is a contract between an individual ("annuitant") and an insurance company. The annuitant agrees to invest a single payment or a series of payments, and the insurance company agrees to pay the annuitant an income, starting immediately or at a later date, for a specified time period. Under current tax law, money put into an annuity grows on a tax-deferred basis until the annuitant begins receiving his accumulated fund as an income. That means that one hundred percent of your earnings are reinvested in an annuity and allowed to compound-- or grow -- without having to pay taxes on earnings.

*All guarantees based upon the claims-paying ability of the insurer...annuity contracts contain exclusive reductions of benefits and terms for keeping them in force. Your licensed financial professional can provide you with the costs and complete details.

How Do Annuities Work?
It's a simple contract. You give the insurance company money. In exchange, the company promises to either pay you an interest rate on your money and your money grows like savings account, or pay you a monthly income lasting for a specified period of time. Taking monthly payments is called annuitization. You have various options when choosing annuitization. This monthly income could last for a set number of years or for the rest of your life. It may also be for the life of yourself and your spouse should you choose to do so. Most people begin receiving annuity income when they retire and continue receiving it for the rest of their life.

The money you invest in an annuity grows on a tax-deferred basis. Your annuity growth is taxed as ordinary income when you begin receiving it (though no income tax is paid on that portion of the annuity that represents the money you originally invested into it). Since most people receive annuity income after they retire when they may be in a lower tax bracket, they generally pay less tax on annuity income than on income they earn while working full time. Two other important points regarding taxation:

  • Whether you�re in the payout or accumulation stage, any income you actually receive from an annuity is taxed as ordinary income rather than as capital gains.
  • If you withdraw money prior to age 59 1/2, you may be subject to an IRS tax penalty of 10% of the accrued earnings.

*All guarantees based upon the claims-paying ability of the insurer...annuity contracts contain exclusive reductions of benefits and terms for keeping them in force. Your licensed financial professional can provide you with the costs and complete details.

How Do Annuities Differ from Life Insurance?
Life insurance pays your family cash benefits when you die. Annuities typically begin paying you an income when you retire and may continue paying you an income for as long as you live. (Most annuities stop paying money when you die; though some annuities can continue paying money to your family after your death if you select that option.)

Is an Annuity Right for Me?
In the past, annuities were considered investments only for people nearing retirement. But today, annuities can be smart investments for people of all ages. Remember, an annuity can be invested in a variety of different investment instruments, offering everything from conservative to aggressive growth vehicles. The following are good uses for annuities:

  • You want a higher interest-rate alternative to CD's and money market funds.
  • You want to help your long-term savings grow without current taxation.
  • You need to save more for retirement, but you have "maxed out" your IRA and 401(k) or 403(b).
  • You need to roll over (reinvest) existing tax-deferred savings, like pension plans.
  • You need to guarantee yourself an income for the rest of your life, and/or your spouse�s.*
  • For Equity Index Annuities, you want to protect your "principal" with a guaranteed rate of return while investing in the equity markets.

*Based upon the claims-paying ability of the insurer.

How Much Should I Invest in an Annuity?
How much money you put into an annuity depends upon your financial goals and the type of annuity you are purchasing. In general, a traditional annuity should be considered for its ability to build tax-deferred earnings from otherwise taxable investments such as mutual funds and CDs. An Equity Indexed Annuity should be purchased for participation in the stock market while protecting principal from downside risk.

Other Advantages
Beyond tax advantages, there are important reasons to invest in an annuity, especially when you consider the limitations of other types of investments. Annuities can provide:

  • Guaranteed income. An annuity can provide you with a guaranteed lifetime income, regardless of how long you live. No other investment instrument can provide this guarantee.
  • Unlimited contributions. Unlike other tax-advantaged investments, such as IRAs, you can contribute an unlimited amount of money to an annuity during the year, whether in periodic installments or a lump sum.
  • Bonus rates. Some annuities award investors with bonuses -- extra interest that further increases your investment. The bonus increases the annuity's principal on which future interest will be calculated in subsequent years, thus providing a substantial boost to the ultimate value of an annuity fund.
  • No risk of loss. Unlike other forms of stock or mutual fund investments, annuities that are tied to the stock market performance may include minimum guarantees to limit the amount of investment risk.
  • No-penalty annual withdrawals. Most annuities have a provision that allows you to withdraw a certain amount per year, penalty free.
  • No-penalty rollovers. Company pension or profit-sharing plan payouts may be reinvested without incurring current taxes or penalties.
  • No probate in case of death. As long as you specify a beneficiary, your proceeds flow directly to that person-outside of probate. Which means your family will find it easier, less costly and more confidential to obtain the value of the annuity.
  • No initial sales charges or annual fees. Annuities are generally �no-load� investments, which means more of your money is actually invested than with vehicles where some money is used to pay an initial or annual charge.
  • Shelter investment earnings. Retired people can use annuities to shelter investment earnings that would otherwise lead to higher taxation of Social Security benefits.

 

*All guarantees based upon the claims-paying ability of the insurer...annuity contracts contain exclusive reductions of benefits and terms for keeping them in force. Your licensed financial professional can provide you with the costs and complete details.

Securities offered thru Investors Capital Corp.
13 Parson's Hill Rd.
Wenham, MA 01984
(800) 776-7262
Member: NASD/SIPC

Bob Adams, CLU
Adams Insurance & Investment Strategies LLC.
P.O. Box 1855
Dover, NH 03821
Tel: 603.842.4333
Fax: 207.636.8200

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