Page 21 - Investment Advisor September 2022

• They may be hard to get out of: or will retire soon because they provide Also called a straight life annuity, a
Particularly when it comes to an some downside protection while offer- single life annuity can provide for lon-
immediate annuity, a client may ing an opportunity for more growth than gevity when there are no other depen-
not be able to get their lump sum a fixed annuity. dents in the picture. The biggest pro
of money back or pass it along to A qualified annuity is a retirement is that this kind of annuity tends to
a beneficiary with any ease — or savings plan that you can contrib- offer the highest monthly payout. But it
even at all. ute to with pretax dollars, such as a doesn’t provide a death benefit or other
401(k), 403(b) or individual retirement support to a surviving spouse or other
ANNUITY TYPES account (IRA). family members.
Fixed annuities promise a stated, guar- A tax-sheltered annuity (TSA)
anteed rate of return on contributions. is a type of qualified annuity. It’s an TAX, OTHER ISSUES
The annuity contract will stipulate this employee benefit specifically offered Annuities don’t serve as a tax-avoidance
rate of return from the outset, mechanism, though they do
and you can expect that same While there are a lot of offer tax-deferred invest-
rate for the duration of the ment growth. Withdrawals
contract. benefits to annuities, there from most annuities will be
Indexed annuities are taxed as income, although
basically the annuity ver- are nuances to consider, such withdrawals from nonquali-
sion of an index fund. These fied variable annuities will be
annuity contracts pay returns as complicated fee structures taxed as capital gains, which
based on the performance of and tax implications. is often a lower rate. There is
an index, so returns won’t be no way to completely avoid
as predictable as with a fixed paying taxes on an annuity.
annuity. When the index declines, the to employees of public schools and Taking money out of an annuity early
annuity holder will receive a minimum other tax-exempt organizations such can lead to large penalties, so it’s impor-
rate of return, which can range from as nonprofits. tant to choose an appropriate annuity
0% to as high as 3%. A nonqualified annuity is funded with term and avoid cracking open this egg
A variable annuity is also pegged to money you’ve already paid taxes on. early. The maturity date on an annuity
investment performance. To the extent When you start withdrawing from your will depend on the type of annuity cho-
that an indexed annuity is similar to an annuity, you won’t have to pay taxes on sen; in the case of an immediate annuity,
index fund, variable annuities are similar the principal, only on the earnings. withdrawals can take place right away
to active mutual funds. Many annuities While many people choose deferred without penalties.
offer a return of premium, meaning you annuities — so there’s time between The value of an annuity will vary
don’t lose your initial investment, but if the accumulation phase and the payout widely depending on what kind it is. An
the value of the underlying investments phase of the annuity — that doesn’t annuity calculator can help you and your
plummets, you might earn nothing in always have to be the case. With an client predict how much an annuity will
terms of growth. Variable annuities also immediate annuity, someone can depos- pay over time, how long the withdrawals
tend to come with higher fees. it a large lump sum into an annuity in will last, how much starting principal
Structured annuities are tied to par- exchange for long-term cash flow. your client needs to achieve a certain
ticular indexes such as the S&P 500 or Immediate annuities can be a good level of ongoing “income” and what
MSCI EAFE, but you can change your fit for those who need the money right growth rate would be required for them
investment strategy during the lifespan away, like if they’re entering retirement. to hit their goals.
of the annuity. Structured annuities Compared with a deferred annuity, For some people, annuities are too
allow policyholders to potentially earn there will be less time for the annuity expensive and complicated, especially
higher gains than with an indexed annu- company to invest and increase your since they yield less than investing in
ity — the trade-off being that they can contributions, so future payments will the market directly. For other people,
also cause policyholders to lose money, generally be smaller than if you paid in annuities can be a much-needed way to
like with a variable annuity. They may the same amount of money but left more ensure their financial viability for their
make sense for people who are retired time for earnings growth. golden years.

SEPTEMBER 2022 INVESTMENT ADVISOR 17