Income Annuity

The slow death of pension plans has led other investment options to fill their void. Income Annuities (or just annuities) offer many of the same benefits of pensions with added federal tax advantages. With planning and foresight, your annuity can help you have a steady income throughout your retirement years.

Annuities Stretch Your Savings

An Income Annuity is another word for an Annuity. Like any broad term, annuities can be many things. Since it is so pivotal to people's lives, annuities are closely monitored by the federal government and the states. In essence, an annuity is a way to stretch your savings through your retirement years. While they should probably not constitute the majority of your retirement portfolio, they can offer security for your retirement.

When you decide to purchase an annuity, your first choice will be how you pay. You can either pay in one lump sum or spread payments out over time. Often, people convert other forms of retirement savings into annuities. Transferring a Roth IRA can actually create greater tax advantages.

Tax Implications

How you pay for an annuity will determine how you are taxed when your annuity pays you. If you pay with tax-deferred income, then your entire payment will be taxed. If you pay with income that has already been taxed, then only the interest will be taxed. This can get complicated, so it is worth asking your financial advisor how this would affect you. Some weird changes to the tax code mean that sometimes it is better for income to be a capital gain and sometimes regular income or visa-versa.

Fixed Interest Rate or Mutual Funds?

The next thing to consider is how your money will grow. You have basically two options: you can elect to get a fixed interest rate or you can buy mutual funds. The fixed interest rate option is good if you purchase the annuity in a time of high interest rates or you do not want to worry about the market. This offers the further advantage that you do not have to continue to think about it.

More Risk with Variable Annuities

If you buy variable annuities, then the amount you are paid will be determined by how mutual funds perform in the market. This can be risky since some annuities can lose all their value if the stock market crashes. Be sure to ask about stock market turbulence when you are considering variable annuities.

Hybrid Annuity Option

Hybrid annuities offer mutual fund options with a minimum interest rate. These often guarantee a minimum payment. Market conditions and your risk tolerance will determine which types of annuities are best for you.

Death Benefits

The last major decision that you will make will be what happens when you die. Options vary depending on whether you have a living spouse or not. You can choose to leave whatever is left of your annuity to your heirs or your spouse can continue receiving the proceeds. Again, this will be up to you.

Annuities can offer safe investments for investors that are looking for peace of mind and are not themselves savvy financial planners. They can also ensure income for people without pensions who do not know how to make their IRA's work well for them. By paying out over a lifetime, an annuity can bring peace of mind to an investor.

What is an Annuity?