The Benefits of Owning a Fixed Annuity
There are fixed and variable annuities; and which you choose depends on several factors. First off, a fixed annuity has (as its name implies) a fixed rate of return. So, you know exactly what you’re going to get for your money. If you’re older and want to be more conservative in your investing, it can be a wise choice. The chief advantage is the tax deferred nature of the annuity. You don’t pay taxes on the monies earned by the annuity each year, until you withdraw. This means more of your money earns you interest over the life of the annuity.
Next, as annuities are sold by insurance companies, the law requires that they maintain a reserve to protect your deposit. Also, they have to have a regular audit by the state to insure the company is solvent enough to meet all of their financial obligations. So, you can be sure your money is safe. Also, all the money from the annuity can be passed on to your beneficiaries directly. It doesn’t have to pass through probate, which can be time-consuming and expensive.
An annuity differs from a 401(k) retirement plan and an IRA (Individual Retirement Account) in that there is no limit on how much money you want. Normally, the only limit is the one placed on it by the insurance company selling it. On the flip side, you also have flexibility on how you withdraw the money. You can elect to get a lump sum payment – all at once, a fixed or variable amount at regular intervals for a set time, a fixed or variable amount for the rest of your life, or you can just take money out when you need it. This final option has the benefit of leaving your money in the annuity to earn you still more interest.
Then there’s the ease of an annuity. You can set one up and maintain it with very little paperwork or hassles. You will not be issued a 1099 form for income on the annuity, which makes your taxes just a bit easier each year.
You can also switch from an older annuity that may not be performing well, to a newer fixed one without any impact to your taxes. This is in accordance with Section 1035 of the Internal Revenue Code. Also, once you retire, it does not affect your social security benefits like stocks, bonds, and other investments do.
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