Your Guide To Equity Annuities

What Is An Annuity?

An Annuity is a type of contract agreement offered through an insurance company that allows you to accumulate funds for retirement on a tax-favored basis, thus generating an income. It is important to know that an annuity is not a savings account, a savings certificate, nor is it considered to be any type of insurance policy. Your value in an annuity contract equals the premiums you’ve paid, less any applicable charges, plus interest credited. The insurance company uses the value to figure the amount of most of the benefits that you can choose to receive from any annuity contract.

A deferred annuity has two parts or periods. During the accumulation period, the money you put into the annuity, less any applicable charges, earns interest. The earnings grow tax-deferred as long as you leave them in the annuity. During the second period, called the payout period, the company pays income to you or to someone you choose.

How Do Equity-Indexed Annuities Compare To Standard Annuities?

Equity-Indexed Annuities have been growing in popularity over the past few years, and depending on your financial situation and needs, may be a viable option for you. Like traditional types of annuities, equity-indexed annuities offer the following benefits:

• safety of premium
• tax deferral
• a minimum interest rate guarantee.

With equity-indexed annuities, the interest earnings are determined based upon the growth in an accepted annuity index, rather than on an accepted interest rate that varies over the years, as is the case with most other annuity types. An equity-indexed annuity is different from other fixed annuities because of the way it credits interest to your annuity’s value. Some fixed annuities only credit interest calculated at a rate set in the contract. Other fixed annuities also credit interest at rates set from time to time by the insurance company. In addition, equity-indexed annuities credit interest differently, using a formula based on changes to the index of which the annuity is linked, and this formula determines how general interest, if any, is calculated and credited. Like other types of fixed annuities, your equity-indexed annuity also guarantees a minimum interest rate. This rate will be applied to not less than the minimum guarantee rate, even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum. For example, many single premium contracts guarantee the minimum value will never be less than 90 percent of the premium paid, plus at least 3% in annual interest (less any partial withdrawals).

The guaranteed value is the minimum amount available during a term of withdrawals, as well as for some annuitizations and death benefits. The insurance company will adjust the value of the annuity at the end of each term to reflect any index increases. Tax Treatment of Annuities

Under current federal law, all annuities receive special tax treatment. Income tax on annuities is deferred, which means you aren’t taxed on the interest your money earns while it stays in the annuity. Tax-deferred accumulation isn’t the same as tax-free accumulation. An advantage of tax deferral is that the tax bracket you’re in when you receive annuity income payments may be lower than the one you’re in during the accumulation period. You’ll also be earning interest on the amount you would have paid in taxes during the accumulation period. Most states’ tax laws on annuities follow the federal law.

Part of the payments you receive from an annuity will be considered as a return of the premium you’ve paid. You won’t have to pay taxes on that part. Another part of the payments is considered interest you’ve earned. You must pay taxes on the part that is considered interest when you withdraw the money. You may also have to pay a 10% tax penalty if you withdraw the accumulation before age 59 1/2. The Internal Revenue Code also has rules about distributions after the death of a contract holder. Annuities used to fund certain employee pension benefits plans (those under Internal Revenue Code Sections 401(a), 401(k), 403(b), 457 or 414) defer taxes on plan contributions as well as on interest or investment income. Within the limits set by the law, you can use pretax dollars to make payments to the annuity. When you take money out, it will be taxed. You can also use annuities to fund traditional and Roth IRA’s under Internal Revenue Code Section 408. If you buy an annuity to fund an IRA, you’ll receive a disclosure statement describing the tax treatment.

Remember that this information is not intended to substitute for advice from an expert, certified financial planner or tax professional. Be sure to discuss all financial and investment options with yours before making any type of financial decision.