3-minute article

Three key tax benefits of fixed indexed annuities

Tax-advantaged product solutions can help clients save more for retirement and potentially grow their savings faster. Most clients may be familiar with 401(k)s and IRAs, but there's another tax-advantaged vehicle to consider for retirement planning: fixed indexed annuities (FIAs).

FIAs are insurance products that offer growth potential and guaranteed income for retirement. Funds in an FIA earn interest credits based in part on the upward movement, if any, of a reference stock market index, such as the S&P 500®. Since money in an FIA is not directly exposed to stock market risk, FIAs also provide protection from loss due to market downturns.

What's more, this combination of growth potential and protection comes with tax advantages that can complement other savings and investment vehicles in your clients' retirement portfolios.

Here is a look at three key tax benefits of FIAs and how they can contribute to a tax-smart approach to retirement planning.

  1. No contribution limits
    Tax-advantaged retirement savings vehicles like 401(k)s and IRAs place caps on how much clients can contribute each year.

    In contrast, FIAs have no IRS-imposed contribution limits for non-qualified funds. This feature may be especially appealing to older clients who wish to accelerate their savings in their final years before retirement, or to high-earning clients who have maxed out their annual contributions to other tax-advantaged accounts.
     
  2. Tax-deferred growth
    Interest credited to an FIA is not taxed until clients withdraw those earnings, which can boost savings and increase the potential amount of future income. Because FIAs also help protect savings from market downturns, clients get the benefit of tax deferral with less downside risk than with 401(k) and IRA assets that are invested directly in the market.

    Keep in mind that the benefits of tax deferral apply only to annuities funded with non-qualified dollars — that is, money on which income tax has been paid. Under current tax law, the Internal Revenue Code already provides tax deferral to qualified money, so there is no additional tax benefit obtained by funding an IRA with an annuity. Annuities do provide other benefits for qualified funds, such as lifetime income and a death benefit.
     
  3. Favorable tax treatment for retirement income
    Withdrawals from 401(k)s and IRAs (including those funded by an annuity) are fully taxable at the retiree’s income tax rate at the time of withdrawal. In contrast, with a non-qualified FIA only the interest earned is taxable when withdrawn. Because the income from an FIA typically is made up of a combination of interest and the return of client's original premium — on which taxes have already been paid — a portion of that income is non-taxable to the annuity owner. As a result, clients can use income from FIAs in conjunction with fully taxable withdrawals from other accounts to help lower their overall tax rate in retirement.

    However, FIAs — like 401(k)s and IRAs — may be subject to federal and state income tax and, except under certain circumstances, will be subject to an IRS penalty if payments start before the annuity owner reaches age 59½. Withdrawals in excess of the free withdrawal amount allowed are subject to a withdrawal charge, which may result in the loss of principal.

The big picture
With their tax benefits and ability to provide growth potential and protection, FIAs can play an important role managing taxes within a retirement savings plan. They may complement other sources of growth potential and retirement income, including stocks, bonds and mutual funds held in taxable brokerage accounts; savings in tax-deferred accounts like 401(k)s; and other tax-advantaged vehicles such as Roth IRAs. Using a mix of these tools can be vital to helping clients minimize the effect of taxes, manage risk and provide growth potential before and after retirement.

This information is brought to you by Athene — where innovative annuity solutions are powered by unconventional thinking.