5 fixed indexed annuity myths busted!
This content is categorized as:As you plan for retirement, you likely come across many options for building your portfolio and creating the savings you need for the future. Among these retirement income solutions, you may have seen fixed indexed annuities (FIAs). If you don’t fully understand these products, don’t worry, you’re not alone. According to a Secure Retirement Institute study, only 1 in 4 consumers can correctly answer at least 7 out of 10 annuity-related questions.
To better understand fixed indexed annuities and if this solution is right for you, it’s important to know how they work and the ways they may fit into your overall retirement plan. A good place to start is by exploring common misconceptions about them and seeing how FIAs can help provide a more secure financial future.
1. Myth — Annuities are full of hidden charges.
Financial professionals and the insurance company that issues the contract must disclose any and all fees associated with annuities. They must clearly explain withdrawal charges, which may be incurred if you surrender the contract during the withdrawal charge period or withdraw money beyond the penalty-free amount allowed in the contract.
When you purchase a FIA, you can allocate your premium among one or more index crediting strategies. While your money is not invested directly in the index, you may receive index credits based partly on how the index performs. Index crediting strategies may include management fees, plus insurance companies employ caps, participation rates and spreads which may limit the interest credited in exchange for protection from stock market risk or losses. There may also be a charge for optional riders. Rider features vary by product, and can offer benefits like lifetime income, increased liquidity or a death benefit option.
2. Myth — Fixed indexed annuities are not tax efficient.
Fixed indexed annuities are long-term, tax-deferred products and can be a valuable solution for those looking to grow their retirement savings. Annuity earnings will grow on a tax-deferred basis until you begin taking withdrawals or surrender the annuity.* Over time, you will have the potential to build more retirement savings than you would have been able to had your earnings been taxed as income. However, there is no additional tax benefit associated with funding a FIA from a tax-qualified source like a 401(k) plan.
3. Myth — Annuities can’t keep up with inflation.
Since inflation can decrease the purchasing power of your savings, a FIA with an income rider may offer payout rates that are indexed to inflation. This can help you keep pace with the rising cost of goods and services and offset the effects of inflation on your retirement savings.
4. Myth — Fixed indexed annuities are not liquid.
It’s important to remember that fixed indexed annuities are designed to meet your needs for long-term retirement savings and income. In exchange for tax-deferred growth potential, protection from market loss and the potential for guaranteed lifetime income, FIAs have limited liquidity compared to some other products. However, in most cases, deferred annuities allow you to withdraw up to a specified percentage of the contract’s accumulated value each year during the withdrawal charge period without any charges. Once the withdrawal charge period has ended, funds may be withdrawn without any charges.
5. Myth — Fixed indexed annuities are investments.
Fixed indexed annuities are insurance products that are designed to help you manage certain financial risks associated with retirement such as volatile markets, falling interest rates and longevity. They do not directly participate in any stock or equity investments.
Consider a fixed indexed annuity.
It makes sense that people may be apprehensive to purchase something they may not fully understand, especially when misconceptions can cause uncertainty. If you are looking for a way to supplement your portfolio and help create a more secure retirement, consider reaching out to your financial professional to discuss FIAs in more detail. Need a financial professional? We can help. By exploring the pros and cons of each option, you will be more prepared to make a confident and informed decision.
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*Withdrawals and surrender may be subject to federal and state income tax and, except under certain circumstances, will be subject to an IRS penalty if taken prior to age 59½.
Guarantees provided by annuities are subject to the financial strength of the issuing insurance company. Guaranteed lifetime income is available through annuitization or the purchase of an optional income rider for a charge.
Fixed indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Market Indices may not include dividends paid on the underlying stocks, and therefore may not reflect the total return of the underlying stocks; neither an Index nor any market-indexed annuity is comparable to a direct investment in the equity markets. Clients who purchase indexed annuities are not directly investing in a stock market index.
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 a qualified contract, such as an IRA, with an annuity; consider the other benefits provided by an annuity, such as lifetime income and a Death Benefit.
Any information regarding taxation contained herein is based on our understanding of current tax law. The tax and legislative information may be subject to change and different interpretations. We recommend that you seek professional legal advice for applicability to your personal situation.
