One of the most popular annuity products is the fixed-rate, or multi-year guaranteed annuity. This relatively simple product offers guaranteed income and higher rates than most competing products, making it a good choice for many. But with so many annuities available today, it’s critical to do a little research and learn which one is best for you and your unique needs. Here’s a deeper look at fixed-rate annuities, including several questions to ask before committing, as detailed in a recent Kiplinger article.
Does the annuity have a pre-set and guaranteed interest rate for the entire guarantee period?
Most MYGAs have a guaranteed interest rate for the entire guarantee period, however some may have a rate change after an initial period. The annuity might offer a higher interest rate for the first year and then a lower rate for the remainder of the guarantee period. Be aware of these rate changes, and be sure to know how soon it can change and wheat the new rate could be.
How strong is the company insuring the annuity?
Annuities are not FDIC insured like bank deposits, but there is a form of insurance provided by state guaranty associations. Instead, annuities are guaranteed by the issuing insurance company. This makes it crucial to check the insurer’s ratings prior to purchase. Agencies such as A.M. Best, Standard & Poor’s or Moody’s provide grades for overall financial strength and claims-paying ability of insurers. You’ll want to be sure that the insurance company you purchase through is financially stable and able to make your payments in the future.
Are withdrawals permitted during the term of the annuity? If so, how much is allowed?
Most fixed annuities let you withdraw some of your total account value each policy year, usually about 10% without penalty. Keep in mind though that withdrawals before you reach age 59 ½ may be subject to an IRS penalty of 10% of the earnings that are withdrawn, plus ordinary income tax.
How is the growth on your funds inside the annuity taxed?
Interest credited to your annuity grows tax-deferred until it’s withdrawn. This can be quite an advantage over the funds inside of a ban CD not held within an IRA or qualified account. The interest earned on a CD is taxed each year, so if you’re earning 1.8% on a five-year CD, paying 25% in federal and state income taxes, you would net about 1.35% annually after taxes. With an annuity, your funds compound at the full quoted rate because you’re delaying taxes. You will owe tax on the gain eventually, but delaying means more money in your pocket in the long run.
What fees are associated with a fixed annuity?
There are no upfront sales fees or ongoing maintenance fees. Surrender charges only occur if you withdraw more than the allowed amount during the surrender period.
What happens to your money in the annuity if you pass away prematurely?
If you happen to die before you’ve gotten back all of the money that you deposited, including accumulated interest, your named beneficiary will receive the amount remaining. On most deferred annuities, the insurance company keeps nothing.
What are your choices when the initial guarantee period is up?
There is typically a lot of flexibility. You can take all the money in cash and pay income tax on the gain, but many don’t take this avenue. You can also rener for an additional term or use the funds to buy another annuity via a 1035 exchange to continue to defer taxes. When transferring to a new annuity, you can choose any type, such as a fixed-indexed or variable annuity. You can also choose to annuitize the proceeds, converting the fixed annuity into a stream of guaranteed lifetime monthly income that begins immediately, or on a future date you choose.
Written by Rachel Summit