Fixed Annuities

Fixed annuities are a safe and risk-free way to plan for your retirement. A fixed annuity is a contract by an insurance company, designed to help you set aside money on a tax-deferred basis. They're safe because you earn a guaranteed interest rate of return for fixed period of time. When you're ready to retire, you can withdraw a portion of your money or turn it into a regular income stream for the rest of your life. Fixed annuities are a great choice for conservative investors.

Fixed annuities differ from variable and other types of annuities in the way your money accumulates. Your annuity contributions earn a fixed rate of interest that remains the same for a specific period of time. Your investment will receive an annual return and ensures that your money will be there when you need it.

Fixed Annuity Basics

Depending on the fixed annuity you purchase, you may pay a single premium or have the option of paying periodic premiums. When you make your initial purchase, the insurance company declares a fixed rate of interest which your annuity will earn for a specific period of time. At the end of that period, the insurance company will declare a new interest rate. The insurance company invests the premiums. If their investments do poorly, the insurance company will still pay you the interest rate promised. The interest rate you are paid will be periodically adjusted up or down, but it will never go below the guaranteed minimum interest rate. The guaranteed minimum interest rate ensures that your account will always earn some interest, no matter what is happening in the economy. With a fixed annuity, the insurance company bears the risk.

Tax-Deferred Earnings on Fixed Annuities

The interest your annuity earns is tax-deferred. Once you begin to withdraw money from your annuity, income tax is owed on your annuity’s earnings. If you are retired and no longer employed full-time, you are likely to qualify for a lower income tax bracket. If the fixed annuity is part of a qualified investment plan, such as an IRA or 401(k) plan, you can contribute pre-tax dollars to the fixed annuity. There are annual limitations on the amount that can contribute.

Retirement income from Fixed Annuities

At retirement, annuity owners may choose to receive regular income checks (annuitization).

Your annuity will usually offer you one of several payout choices such as:

• Income checks for a specific number of years, such as 10 or 20 years;
• Income for the rest of your life;
• Income for the rest of your life and your spouse’s;
• Income for the rest of your life with a specific number of guaranteed payments, and if you die prematurely, remaining payments to your beneficiary.

You can also make occasional or periodic withdrawals from your annuity. Keep in mind that this choice comes with a tax disadvantage. The IRS views all the money that comes out first as earnings, rather than as a combination of earnings and contributions. As such, that money will be taxed at ordinary income tax rates.

Fixed Annuities - Early withdrawals

If you need to withdraw money from your fixed annuity prior to retirement, you may have access to it without paying a withdrawal fee. Most fixed annuity policies restrict withdrawals during the early years of your annuity. But after a period of time—usually between 3 and 10 years—you may be able to withdraw a portion of your account without incurring withdrawal fees. Withdrawal fees usually decrease the longer you own your annuity. Some fixed annuities allow you to withdraw funds without paying a withdrawal fee if you are confined to a hospital or nursing home. You will have to pay taxes on any earnings that are withdrawn.

Distributions of earnings are subject to ordinary income tax, and if taken prior to age 59 ½ may be subject to a 10% premature distribution federal tax penalty.

Fixed Annuity Options

Not all fixed annuities are the same. Most have similar features and benefits. Others may look like the opportunity of the century, but are loaded with disclaimers and contingencies. Make sure you understand what you're buying. Read the fine print.
Look for these features when you are considering a fixed annuity.

Extended care waiver
This gives you the ability to access your money if you're confined to a qualified institution or extended care facility for specified amount of time. Your annuity's surrender charges would be waived.

Terminal illness waiver
This waiver lets you take one free partial or full distribution of your annuity if you are diagnosed with a terminal medical condition.

Surrender charges
Surrender charges generally range from 5% to 8% for the first year or two and then decline by approximately one percentage point each year. After five or more years, they disappear. Annuities with unusually high surrender charges may be compensating for having to pay higher than normal first-year rates.

Easy access to your earnings
You should be able to take 100% of accumulated interest earnings from your policy without a surrender charge through one of two methods:
Random distribution of your interest 30 days after policy issue date ($250 minimum); or
Systematic distribution of your interest monthly, quarterly, semi-annually or annually, 30 days after the policy issue date.

Distributions in excess of permitted free amounts will be subject to an early surrender charge. Distributions taken prior to age 59½ may be subject to a 10% federal income tax penalty.

Interest enhancement
Some fixed annuities have a 1% interest enhancement guaranteed on the initial premium for the first policy year — others may have a 2% interest enhancement. If you choose an annuity with an interest enhancement that is greater than 2%, be sure to review that product's interest rate history.

Five-year rate guarantee option
This optional rate guarantee allows you to earn a competitive rate for five full years on your initial premium.