When comparing annuity rates it is important to understand the differences between the different types of annuities. This article outlines the differences and what to look out for when purchasing annuities.
When evaluating annuities there are a few things to consider.
In considering tax advantages of investing in different annuities you’ll need to find out whether the investments into the annuity are tax-deductible or non-tax-deductible. Retirement plan annuities are usually tax-deductible, but the question should be asked and answered when you’re evaluating annuities. Tax liabilities should also be weighed.
When evaluating how the payments from an annuity will be taxed, you’ll need to know that the tax rate will depend on the origin of the funds. Payments from annuities paid for by tax-deductible contributions will be taxed at payment at the recipient’s current income tax rate. If the annuity was a non-tax-deductible annuity, then when payments are made only the portion which is an investment gain will be taxed at the recipient’s current income tax rate. Also, depending on the individual recipient’s entire financial picture, it is sometimes more advantageous to have recipient payments carry a lesser tax load than payments made into the annuity.
If the person receiving the payment is less than the age of 59.5 or over 70.5, there are penalty taxes which may kick in, and should be discussed thoroughly with your accountant, tax specialist or financial advisor prior to making a decision about which annuity to choose. The industry sometimes uses the terms “qualified” or “non-qualified’ to refer to whether funds paid into an annuity are tax-deductible.
The difference between a fixed annuity and a variable annuity is in how the payment to the recipient is structured. There are also some differences between fixed and variable annuities in how interest is compounded on the payments made into the annuity.
A fixed annuity will make payments of a fixed amount to the payment recipient for the term of the contract, usually until the death of the payment recipient, with the insurance company guaranteeing both the principle and the earnings. A variable annuity guarantees a minimum payment to the payment recipient, with the remainder above the minimum payment varying depending on the performance of the managed portfolio.
Each financial situation is different, and the help of a financial advisor in evaluating different annuities is advised. There are websites which can help you in finding annuity rates, but the decision is one that needs more expertise than most average people possess, due to the tax and estate ramifications both during the investment phase and the payment phase of an annuity.
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