If you’re like many investors these days, you may have some cash sitting in the bank hardly earning any interest. It’s a common situation. This financial position begs the question: Should you do something else with that money?
Recently, financial investing looks to be on the rise. The stock market is climbing to new highs, and the real estate values continue to grow along with Bitcoin, gold prices, etc. Despite recent positive outcomes, you still may be reluctant to rely on the constant ups and downs of these markets and values. I’d like to help educate you on an alternative investment: a fixed annuity.
Fixed Annuities: What’s the Point?
When people hear the term “annuity”, the first thing that comes to mind is a guaranteed income stream. However, that is not the only feature of a fixed annuity. The purpose of fixed annuity is to obtain a guaranteed rate of interest that is not tied to the often-unstable stock market, bond market, or otherwise. An annuity is a contract between the investor and an insurance company. The company promises to make periodic payments of interest to the investor. An investor can buy an annuity either with a single payment or a series of payments. The insurance company guarantees both the rate of return (i.e., the interest rate) and the payout to the investor.
Also, fixed annuities are tax-deferred. If you leave the yearly interest in the annuity and allow it to accumulate, you do not have to pay taxes on the interest earned. The only tax you pay on the earnings would be at the end of the annuity when it matures. In summary, there are a few tax benefits associated with fixed annuity accounts when it comes to interest.
Rating the Rates
With all this talk of fixed annuities, you may be asking yourself: what about Certificates of Deposit? Certificates of Deposit (CD’s) at your local bank have generally served as a way to earn static interest but if you’ve checked CD rates lately, they are very low in relation to what they’ve paid historically. In general, interest rates have declined over the last several decades.
There are some differences between CD’s and Fixed Annuities. CD’s are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas fixed annuities are not. However, annuities are guaranteed by the company who issues them, so it’s important to work with a reputable, highly rated carrier. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Growth is fixed and may not keep up with inflation. That means their actual value may decline over time. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges apply.
Beyond this post, check with your asset protection attorney for guidance on your specific situation. Annuities are generally creditor-protected in the State of Florida, providing an added layer of security in the event a creditor tried to claim a lien on your assets. In short, talk to your Financial Advisor today about fixed annuities to see if they deserve a place in your portfolio.
December 2020
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
