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Some annuities have the potential to earn interest or credits based on the growth of an external index (we call this “indexed interest”). You can choose from one or more external indexes and crediting methods, depending on your financial goals. Other types of annuities offer growth potential through variable investment options.
You don’t have to pay income taxes on the earnings in your contract until you take money out of your annuity. Tax deferral may help the money in your annuity compound over time, for even greater accumulation potential.
Annuities can help protect the money you place in your contract (the “principal”). Some annuities protect all of your principal from market downturns, while others offer greater potential in exchange for some market risk, including the risk of losing principal.²
After a period of time specified by your contract, annuities provide guaranteed retirement income. Some annuities let you choose from a variety of income options – and some even offer the opportunity for income increases in retirement. These options may either be built in to the contract or optional and available for an additional cost.2
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Some common retirement-account tax rules apply to annuities – but not all of them. Let’s begin with tax deferral: Because the money you place in an annuity grows income-tax-deferred, you don’t have to pay income taxes on any interest or gains until you take money out of your contract. Any distributions from your annuity will be taxed as ordinary income. But – as with IRAs, 401(k)s, and pension plans – if you take money out of your annuity before age 59½ you’ll have to pay an extra 10% federal additional tax on top of any ordinary income tax. Please consult your tax advisor for guidance about your unique situation.
If an annuity is a good fit for you, the purchase amount will depend on your financial needs and goals. Annuities are a long-term contract, so it’s important to be sure you won’t need the money for other financial commitments or unexpected expenses. Your financial professional can help you determine whether an annuity makes sense as part of your overall retirement strategy, and in what amount.
Nonqualified annuities (those held outside a retirement account) are not subject to RMDs beginning at RMD age. That’s because nonqualified annuities are purchased with money on which you have already paid income taxes. However, if you purchase an annuity within an Individual Retirement Account (IRA), you’ll have to take RMDs beginning at RMD age. You should also be aware that some annuity contracts require you to start distributions at a certain age (generally between 85 and 100) – so it’s important to ensure that the contract meets your long-term goals. A tax advisor can help you understand the tax implications of buying an annuity.
There are different kinds of annuities. Some give you immediate access, while others have a waiting period. Contracts that require waiting a specific period of time before you take money out are called deferred annuities. Typical deferral periods can range from three to 10 years. After the deferral period, you can annuitize the contract (this means you start receiving money through scheduled lifetime payments, or “annuitization”). Some annuities also let you take free withdrawals during the deferral period, up to specified amounts. But it’s important to understand your contract – because if you take out more money than it allows before the deferral period ends, you will likely incur a surrender or withdrawal charge and market value adjustment (MVA).
A market value adjustment (MVA) is a calculation we use to adjust your annuity’s withdrawal amount. An MVA may adjust the withdrawal amount up or down, depending on the interest rate conditions when you take distribution(s) compared to those conditions when you contributed your premiums. But while the MVA can affect your withdrawal amounts, it can never cause your contract’s cash surrender value to be less than the guaranteed minimum value or greater than the accumulation value.
There are a lot of questions about annuities, their purpose, and their cost. The fact is, annuities aren’t right for everyone. It’s also true that some annuities charge fees in exchange for the benefits they offer. But for people who want the opportunity to accumulate for retirement, a level of protection from market volatility, and guaranteed lifetime income, annuities can be a valuable addition to their overall financial portfolio.
Annuities help protect some of your retirement assets in the same way you protect your car, your home, and your health. In each of these cases, you’re transferring away some of the risk of financial loss to an insurance company. A fixed index annuity (FIA) offers the potential to build some of your money with principal protection from market downturns. A registered index-linked annuities (RILA) offer the opportunity for a level of protection through a variety of crediting methods (which may also be called index strategies). Both FIAs and RILAs provide income payments during retirement – and tax deferral and a death benefit during the accumulation phase.
At www.mdtaxpro.com, we believe that every client deserves personalized attention and a tailored approach to their tax needs. We take the time to understand each client's unique situation and provide customized solutions that meet their specific needs.
Our team of tax professionals has years of experience in the tax industry and stays up-to-date with the latest changes in tax laws and regulations. We use our expertise to help our clients navigate the complex world of taxes and achieve their financial goals.
We offer a variety of tax services, including tax preparation, planning, and consulting. Our services are designed to help individuals and businesses minimize their tax liability and maximize their financial success.
At www.mdtaxpro.com, we believe that every client deserves personalized attention and a tailored approach to their tax needs. We take the time to understand each client's unique situation and provide customized solutions that meet their specific needs.
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