Many people only think of an annuity as something that pays an income for as long as they live. This is one benefit all annuities – and only annuities – offer. It is also the reason why people buy immediate annuities (also called income annuities). However, the lion’s share of annuities are purchased as saving places and never turned into immediate annuities (the conversion is called annuitization). One of the reason annuities are used as saving places is that taxes on any interest earned may be deferred as long as the interest remains inside the annuity.
There are two main branches on the annuity tree:
Variable annuities are registered as securities and offer various investments. Since they are securities they are subject to stock market risk and can lose money. When you hear that annuities have fees, they are usually talking about variable annuities. Variable annuities can be annuitized and turned into a lifetime income stream, but the income will fluctuate depending on how the underlying investments perform.
Fixed annuities do not subject principal or interest earned to market risk – in others words, you can never lose what you’ve made because the stock market went down or some bond issuer went out of business. Fixed annuities can also be annuitized, but the income will remain stable and not go down.
Fixed Annuities as Saving Places
Annuities used as saving places are called deferred annuities, because, as mentioned, the annuity owner has control over when to take the interest out of the annuity and pay income taxes on it. All fixed deferred annuities guarantee a minimum return. The three types credit interest in different ways:
Fixed Rate Annuities declare a new interest rate each year. It will fluctuate, but will never be less than the minimum interest rate stated in the annuity.
Multi-Year Guaranteed Annuities (MYGAs) lock in a rate for the term selected of two to ten years.
Fixed Index Annuities base the amount of interest earned on the performance of an external index. Although the degree to which the annuity participates in any gains is locked in, the actual interest earned depends on well the index performs. Since this is a fixed annuity it does not lose any value if the index goes down, instead, zero new interest is earned for the period.
Fixed Annuities for Income
Immediate annuities pay an income for a specified period of years or for life. The biggest concern when getting an immediate annuity with a life income is dying too soon, with the result that the annuity company keeps most of the money. This can be offset by setting up the annuity to pay for the greater of life or a specified period of years (life with period certain). You can also choose a cash refund option that means payments will continue until all of the principal has been returned if early death occurs.
Withdrawals are another way to get income. The deferred annuity remains intact, but the annuityowner takes out the interest earned each year. Indeed, most deferred annuities allow the withdrawal of up to 10% of the value each year without penalties.
Guaranteed Lifetime Withdrawals Benefits (GLWBs) are withdrawals from the deferred annuity, but they are guaranteed to last a lifetime even if the annuity account goes to zero. The income is stable, but unlike an immediate annuity, here the annuityowner retains control over the remaining account balance. GLWBs are usually an optional benefit for which a fee is charged.
Annuities have similarities with other savings choices (and one difference):
IRS “Under Age 59½” Premature Distribution Penalty is in addition to the normal income taxes owing, and can be avoided if certain conditions are met. In the case of annuities not held in qualified plans, the penalty only affects withdrawn interest earned over and above the original principal.
Penalties for Early Withdrawal (surrender charges) are made if the annuity is cashed in prior to the end of the term initially agreed to. Surrender periods vary in length from one to twelve years. For the vast majority of policies, penalties do not apply if the policy is cashed in due to death of the owner. The annuity may be continued after the penalty period and no penalties are charged.
Maturity Date is the longest one can keep annuity interest deferred before it must be taken out. Maturity dates usually occur when the annuitant celebrates their 80th to 90th birthday, but some new policies may be kept until age 100 (the annuitant is the person upon which the annuitization life income is based – usually the owner). Although many financial writers get this confused, the maturity date is not how long the insurance company makes you keep your annuity with them, but how long the insurer will let you keep your money with them.
For educational purposes only. It does not provide investment, tax or legal advice. Information believed accurate, but is not warranted. Past performance is not an indication of future results. Both investments and fixed annuities involve certain risks; a consumer should consult with their advisor.
Fixed annuities are not bank instruments and are not insured by FDIC.
This November, you will be voting “red or blue” in the Presidential election. The most of important thing, of course, is that you vote. I don’t want to sound like a broken record and say that these are not normal times. But, what if they are for a while. Many years ago, I attended a conference where they spoke of the “circle of concern and the circle of influence.” The circle of concern is much larger. And, they are items that we usually don’t have any control or an ability to influence, these items. Sure, they keep us up at night but beyond our control. Examples could be a hurricane, tornado, COVID-19 etc. On the other hand, the “circle of influence” is comprised of items that we can influence and change... or, at least protect ourselves from. Let me explain.
My title of this article is “Red or Blue… but not Black AND blue.” Yes, you can affect change through your vote. But, how do you protect your nest eggs from getting “Black and Blue?” I am referring to some very volatile times in the equity markets. Please allow me to state that I am not giving investment advice. As you know from my previous writings, that I am and always have been a big fan of the equity markets. So, I am speaking to Baby Boomers and above. Do you have the appropriate amount of money at risk? Can you afford another potential downturn in the market? Do you have the “stomach” for a 10%, 15%, 20% or more drop in the market? Now, I can’t control the market… it is in my circle of concern. But, I can influence the outcome by making sure I have the proper amount of my nest egg in Safe Money Places.
So, in closing, make sure you vote… red or blue. But, don’t let your nest egg get “Black AND Blue.” You can influence that. If you would like to discuss options with a licensed agent in your state, give us a call and we will set up the appointment. Or, contact a member of the Safe Money Places Agent Network. Stay safe.
I don’t think that I need to say that these are not ordinary times. This pandemic is (I hope) a once in a lifetime occurrence. I, like you, have witnessed many events that we could not avoid. One only has to remember 9/11, the dot com crash in 2000, and the financial meltdown in 2008/2009. But, this COVID-19 experience may top the charts. While I am confident that we will get through this pandemic, there will still be carnage. Today, I am speaking about retirement income nest eggs for current, or soon to be, retirees. I would also like to remind you that I am not giving investment advice . I do believe in the equity markets, I do understand that long term markets have always come back. But, for many of us, there might not be time to build those accounts to the numbers we had imagined. That is why I am speaking of a retirement income vaccine.
Okay, let’s get the genie out of the bottle. I am speaking about annuities that can provide a steady stream of guaranteed retirement income. I am not here to argue about whether equities or annuities are best. I am also not here to suggest that you empty your “equity bucket” and place all your money in an annuity. But, I am suggesting that you empty some of your “worry buckets.” If you are like me, you look forward to a steady stream of retirement income that is guaranteed and one that you can’t outlive. So, I have some suggestions.
First, identify what is keeping you up at night. Next, look at a timeline and identify the date that you will need the retirement income. Separate essential from discretionary income needs. Then, ask yourself if you have the appropriate amount of money at risk. Then, make a decision. Is it time to place some of your nest egg in a product that will guarantee principal and all previous gains? Yes, in some products there are penalties for early withdrawals, but as long as you play by the rules… all will be safe. Some of these products will allow you to take income immediately, and some you can defer payments. Yes, these are annuities. I suggest that it could just be the vaccine that your retirement income account needs. Stay safe, do your homework… but do investigate an annuity. No, I am not giving investment advice. I’m just giving you an additional tool to help you sleep at night.
Family reunions and gatherings are a great way to stay in touch with the people we love. Unfortunately, the current state of COVID-19 and the lurking possibility of a second or third wave of outbreak may make these activities difficult to plan. However, remote apps like video chat and EVites make it possible for families to still connect for large gatherings from a distance. Here are some of the best apps for remote family reunions that can ensure you and your family are still able to enjoy time together.
Best Video Chat Apps for Family Reunions
We’re probably all familiar with easy video chat apps like Facetime, but there are others that allow for many users to join at once. Connecting over these can be done from a desktop or laptop computer, as well as mobile devices like phones and tablets. Most of these are free and just need one person to host the event from their device and invites to be sent to others.
Planning reunions and get togethers can be a logistical difficulty, particularly when you a large guest-list. This is even more true from a distance, as more folks may be able to join without the added difficulty of traveling far distances. For that reason, EVites and digital invitation apps are a big help. In addition to being a convenient way to keep track of who’s joining your event, these apps also feature beautiful design options that can give your invitation that personalized and colorful feel you crave.
Best Polling Apps for Family Reunions
Everyone seems to have an opinion when it comes to event planning. Whether it’s about the group activities, timing questions, or decisions about which video chat app to use, a polling application can allow a user to ask questions and get a precise count as to which options work best. You might use these to ask questions like, “What day works best for our virtual family reunion,” or, “Which games do we want to play?”
Did you know you can sell all or a portion of a life insurance policy, even term insurance?
Selling an unwanted life insurance policy is no different than selling your car, home or any other valuable asset that will create immediate cash. Contact us today to learn more.
Life Settlement Advisors
For one reason or another, you may need to take some money out of an IRA before reaching retirement. You can withdraw money from an IRA at any time and for any reason, but it's important to keep in mind that most IRA withdrawals are at least partially taxable. In other words, you'll owe regular income tax on the amount. In addition, the taxable portion of a withdrawal taken before age 59 1/2, which is called an "early withdrawal," will be hit with a 10% penalty — unless you qualify for an exception.
The exceptions apply to traditional IRAs, SEP-IRAs and SIMPLE-IRAs. (However, some early withdrawals from SIMPLE-IRAs are hit with a 25% penalty rather than the standard 10% penalty. For simplicity, the rest of this article will ignore that higher 25% rate.)
Also, be aware that different rules apply to withdrawals from Roth IRAs and qualified plans, such as 401(k) plans.
Exceptions to the Penalty
So what are the exceptions to the 10% early withdrawal penalty? Let's take a look:
1. Withdrawals for medical expenses. If you have qualified medical expenses in excess of 10% of your adjusted gross income (AGI) in 2020 (and 2019) early IRA withdrawals up to the amount of that excess are exempt from the 10% penalty. To take advantage of this exception, you don't need to trace the withdrawn amount to the medical expenses. However, those expenses must be paid in the same year during which you take the early withdrawal.
2. Substantially equal periodic payments (SEPPs). These are annual annuity-like withdrawals that must be taken for at least five years or until you reach age 59 1/2, whichever comes later. The rules for SEPPs are complicated, so you may want to get your tax advisor involved to avoid pitfalls.
3. Withdrawals after death. Amounts withdrawn from an IRA after the IRA owner's death are always free of the 10% penalty. However, this exception isn't available for funds rolled over into a surviving spouse's IRA or if the surviving spouse elects to treat the inherited IRA as his or her own account. If the surviving spouse needs some of the inherited funds, they should be left in the inherited IRA (in other words, the one set up for the deceased spouse). Then, the surviving spouse can withdraw the needed funds from the inherited IRA without any 10% penalty.
4. Withdrawals after disability. This exception applies to amounts paid to an IRA owner who is found to be physically or mentally disabled to the extent that he or she cannot engage in his or her customary paid job or a comparable one. In addition, the disability must be expected to:
6. Withdrawals for qualified higher education expenses. Early IRA withdrawals are penalty-free to the extent of qualified higher education expenses paid during the same year. The qualified expenses must be for the education of:
8. Withdrawals by military reservists called to active duty. This exception applies to certain early IRA withdrawals taken by military reserve members who are called to active duty for at least 180 days or for an indefinite period.
9. Withdrawals for IRS levies. This exception applies to early IRA withdrawals taken to pay IRS levies against the account. However, this exception is not available when the IRS levies against the IRA owner (as opposed to the IRA itself), and the owner then withdraws IRA funds to pay the levy.
Before and After a Withdrawal
With some exceptions, IRA owners who make IRA withdrawals before age 59 1/2 must file a form with their tax returns. Specifically, they must file Form 5329, "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts."
If you think you qualify for an exception to the 10% penalty on early traditional IRA withdrawals, consider involving your tax pro before making a big early withdrawal. You want to be sure that you do indeed qualify. Better safe than sorry!
Early Withdrawal Downsides
Even if you qualify for an exception to the 10% early withdrawal penalty, remember that you still have to pay regular income tax on the amount. And you'll lose out on the benefit of future tax-deferred compounding growth on the withdrawn funds.
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