Annuities

What is an annuity?

An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some time in the future. You can purchase an annuity either with a single lump sum payment or a series of payments called premiums.

What does an annuity do and how do they work?

The main function of an annuity is to provide a steady stream of income, typically during retirement years. Annuities can be customized to meet the specific needs and goals of the purchaser, meaning you can choose how you fund the annuity (lump sum or premiums), as well as when you want to start receiving payments. An annuity that begins paying out immediately is called an immediate annuity, while one that delays your payout for some time in the future is called a deferred annuity.

Additionally, the duration of the disbursements can also vary based on your choice. You can choose to receive payments over a specific period of time (20 years for example) or for the rest of your life. With the lifetime payments, you will not outlive your assets, which is one of the main features of an annuity.

How are annuities taxed?

It is very important to know the taxes work when it comes to annuities. While the balance grows on a tax deferred basis, the disbursements you receive are subject to income tax. Additionally, there are two types of funding tax categories for annuities: qualified and non-qualified.

A qualified annuity is a retirement savings plan that is funded with pre-tax dollars, as defined by the IRS. Contributions to qualified annuities are deducted from a buyer's gross earnings and grows tax-free. For example, if you have money sitting in an old 401(k), 403(b) or IRA, you could roll that money into an annuity and it would be considered a qualified annuity. Like a 401(k)(, 403(b) or IRA, the balance grows on a tax deferred basis and tax is imposed after retirement when distributions are made.

A non-qualified annuity is a retirement savings plan that is funded with after-tax dollars, as defined by the IRS. This means that you have already paid taxes on the money before it goes into the annuity and when you take the money out, only the earnings are taxable as ordinary income.

Please note that unlike traditional retirement accounts, like a 401(k) for example, the money you contribute to an annuity does not reduce your taxable income.

Types of Annuities

There are 3 main types of annuities, Fixed, Variable and Indexed, that have varying levels of risk and payout potential associated with each type.

Fixed Annuity

A fixed annuity offers the least risk and the most predictability of the 3 types of annuities. While the returns for fixed annuities are modest compared to the other types, they come with a guaranteed, minimum rate of return so you will know in advance how much your annuity will grow and how much it will payout. The two different styles of fixed annuities are fixed immediate annuities, which pay you a fixed rate right now, and fixed deferred annuities, which pay you later. Fixed annuities could earn a higher rate than the minimum but only the minimum rate is guaranteed.

Multi-Year Guaranteed Annuity (MYGA)

A multi-year guaranteed annuity, or MYGA, is a type of fixed annuity. It offers a fixed interest rate for a specified period of time, anywhere from 3 to 10 years. MYGAs are geared towards people who are close to retirement looking for a way to defer taxes while guaranteeing a return on their investment.

Variable Annuity

Variable annuities provide the highest potential of return but comes with the highest risk of the 3 types of annuities. The periodic payments are based on the performance of "sub accounts" that fund the growth of the annuity. There is potential to see high returns if the sub accounts perform well or you could lose money if the sub accounts perform poorly.

Indexed Annuity

Indexed annuities have a medium risk and reward, as the rates are tied to the performance of a market index, like the S&P 500. If the market index performs well, you would get a higher payout that could be higher than what you would get with a fixed annuity that has a guaranteed, flat rate. Additionally, there is more protection in an indexed annuity compared to a variable annuity, as the interest rate is guaranteed never to be less than zero, even if the market goes down. However, it is good to know that even if a market index does well, indexed annuities only allow you to see a gain at a certain percentage, called a "participation rate."

The CRJ Business Solutions Difference

At CRJ Business Solutions, we specialize in fixed, MYGAs and indexed annuities. We believe annuities can be a great addition to your portfolio to help with your retirement goals alongside your other retirement accounts like a 401(k), 403(b) or IRA. In fact, we can even roll over all or a portion of qualified retirement accounts funds into an annuity to give you another retirement earning vehicle.

We know how important quality and reliability are to our clients so we want to make sure the products we sell will perform well, while offering the maximum returns and value possible.