Binance Denies Being Hacked, as CEO Confirms “All Funds are Safe”

Annuities are contracts issued by insurance companies that have some tax advantages. They are often used in retirement planning because they can provide an income stream after generating earnings on a tax-deferred basis.

Bob MacDonald, founder of LifeUSA, writing in Forbes, defines an annuity as a long-term contract between a buyer and an insurance company that allows the accumulation of funds on a tax-deferred basis for later payout in the form of a guaranteed income, the core strength being the safety the guarantees. MacDonald believes annuities have a place in a retirement plan.

There are many types of annuities. This article will describe the main types of annuities and the ways they can be used in retirement planning.

The scenarios discussed in this article apply in the United States. Readers are encouraged to consult their accountants about tax considerations related to buying annuities.

CNN Money encourages people to consider an annuity after they have maxed out other tax-advantaged retirement investment vehicles, such as IRAs and 401(k) plans. If a person has additional money to set aside for retirement, an annuity’s tax-free growth can be beneficial, especially if the investor is in a high-income tax bracket.

Annuities have drawbacks, CNN Money notes. The money cannot be withdrawn for a period of time without incurring a penalty fee and taxation. Typically, if the owner makes a withdrawal within the first five to seven years after buying the contract, they will have to pay a surrender charge of up to 7% or more on the withdrawn amount. Annuities sometimes charge other fees as well.

Immediate And Deferred Annuities

There are two basic types of annuities: immediate and deferred.

The purpose of an immediate annuity is to provide income for the owner right after buying the annuity. People typically buy an immediate annuity as a way to have a guaranteed income.

The purpose of a deferred annuity is to grow the funds to provide future income. Deferred annuities can be converted to immediate ones when the owner wants to begin collecting their payments.

Annuities have different payout options.

One option is income for a guaranteed period, which is also called “certain period annuity,” according to CNN Money. This guarantees a specific payment for a specific time period. If the owner dies before the period ends, the beneficiary receives the remainder of the payments.

Another option is lifetime payments that guarantee a payout for the owner as long as they are alive, but there is no survivor benefit. The payouts can be variable or fixed, depending on the type of annuity. The amount of the payout depends on the amount invested and the owner’s life expectancy.

Still another payout option is life with a guaranteed period certain benefit, also known as “life with certain period.” The owner receives a guaranteed payout for life along with a period certain phase. If the owner dies during the certain period, the beneficiary continues to receive the payment for the remainder of that period.

Joint and survivor annuity is one in which the beneficiary continues receiving payments for the rest of their life after the owner dies.

The primary factors taken into account in the calculation of annuity payments are the current dollar value of the account, the age of the owner, the expected future inflation adjusted returns from the assets in the account, and the annuitant’s life expectancy based on industry standard life expectancy tables, according to Investopedia.

Surrendering Annuities

An annuity can be surrendered. If the owner surrenders their annuity before a specific time period, there will likely be a surrender fee. The surrender charge usually declines by one percentage point per year after the annuity is purchased until it disappears completely, usually after seven or eight years.

It is possible to exchange an existing annuity for a new one. These are known as 1035 swaps under the IRS code in the U.S., according to CNN Money. There are no taxes incurred when exchanging one annuity for another. However, when exchanging an old annuity for a new one, the owner begins a new surrender period.

In addition, the spousal provisions in the annuity contract are also considered.

Fixed And Variable Annuities

Annuities are usually either fixed or variable.

A fixed annuity offers an assured amount of payment over the payment term or the annuitant’s life and carries little risk. The annuitant usually receives a fixed amount of money every month for the rest of their life. However, the price for removing risk is limiting growth opportunity. Should financial markets have a bull market, the annuitant misses out on these additional gains.

Variable annuities, on the other hand, allow the annuitant to participate in the potential appreciation of their assets while still drawing an income from their annuity. With a variable annuity, the insurance company typically guarantees a minimum income called a guaranteed income benefit option and offers an excess payment amount that fluctuates based on the performance of the annuity’s investments.

Variable annuities can provide a balance between guaranteed retirement income and continued growth exposure, according to Investopedia.

Variable annuities usually have management fees. The ongoing investment management and other fees oftentimes amount to 2% to 3% a year.

The fee structures can be complex. Insurance agents and others who sell annuities often tout the positive features and downplay the drawbacks, making it important for the purchaser to carefully review the annuity before buying.

Not all annuities have high fees, however. “Direct sold annuities” that are not sold by insurance agents do not charge a sales commission or a surrender charge, according to CNN Money. Companies offering “direct sold annuities” include Schwab, Fidelity, Vanguard, T. Rowe Price, Ameritas Life and TIAA-CREF.

Before investing, one should compare the annuity fee structure with regular no-load mutual funds. No-load mutual funds levy no sales commission or surrender charge and impose average annual expenses of less than 0.5% for index funds or around 1.5% for actively managed funds.

It’s also important to consider that earnings from an annuity will be taxed as ordinary income when the earnings are withdrawn, no matter how long the owner has owned the account.

For some investors, it is critical to secure a risk-free income for their retirement. Other investors are less concerned about fixed income than about continuing to enjoy the capital gains of their funds. These needs determine it is better to choose a fixed or variable annuity.

The factors in deciding between an annuity and a mutual fund will be addressed in a future article.

The post Binance Denies Being Hacked, as CEO Confirms “All Funds are Safe” appeared first on Crypto Currency Online.

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