Fixed Index Annuities and Retirement Savings Protection
What is a fixed index annuity, how does it work, and what are some advantages?
You worked hard to build your retirement assets, so it’s important to protect those funds. There are a few retirement strategies that include security for your portfolio, such as a fixed index annuity.
So how does a fixed index annuity work, and is it the right choice for you?
What is a Fixed Index Annuity?
A fixed index annuity is a tax-deferred, long-term savings option. It provides principal protection in a down market, and gives an opportunity for growth. As the market can vary from bearish to bullish, a fixed index annuity provides security in market declines.
A Fixed Index Annuity Provides:
- Potential to earn competitive interest rates with index-linked interest crediting.
- Your contract value is protected and you can’t lose principal value to market declines.
- Option to receive retirement income when you need it, including the option of guaranteed income for life.
- Opportunity to participate in a portion of market-based growth without being exposed to market risk.
- Tax-deferred growth potential.
- A choice of interest-crediting methods.
- Potential financial legacy options for your beneficiaries
How does a Fixed Index Annuity work?
A fixed index annuity is a contract you set up with an insurance company. You choose what insurance company to use and provide a purchase payment. Here are a few services you can receive from the insurance company:
- A tax deferral on post-tax assets.
- Safety of growth.
- Growth potential without being invested in the market.
- Access to your money.
- The option of lifetime retirement income.
- Beneficiary protection.
Here are a Few Things to Consider:
- With a fixed index annuity, you’re not directly investing in the index and do not receive dividends.
- Growth potential can be limited.
- May have limited access to your contract value during the initial withdrawal charge period.
- The potential for no interest earnings during some time periods if an index-linked option is chosen and the index return is negative or flat.
- Interest earnings are taxable as ordinary income upon distribution.
- A 10% IRS penalty may apply in certain situations where distributions are taken before age 59 1/2; for non-qualified contracts, an additional 3.8% federal tax may apply on net investment income.
- All guarantees are subject to the claims-paying ability of the issuing insurance company; if the insurance company becomes insolvent, you could lose all or portion of your future guarantees.
Build Retirement Income through Tax Deferral
You won’t pay taxes on interest your contact earns until you make withdrawals, or convert your contract to a stream of guaranteed retirement income. Because of this, all of your interest earnings remain in your contract, compounding interest faster.
Ability to Choose Interest-Crediting Methods
You can decide how to allocate your purchase payments among a variety of options. These options will define how you earn interest and help grow your contract.
Fixed-Rate Interest Crediting– earns guaranteed rates of interest over specific periods of time.
Index-Linked Interest Crediting– means the amount of interest you earn depends on the movement of a market index over a given period of time.
To dive deeper into fixed index annuities, check out our free Fixed Index Annuities Guide. You’ll learn about your choices for earning interest, understanding index-linked credit options, and calculating the maximum interest-crediting amount.
Feel free to download our free Fixed Index Annuities Guide or contact us if you have any questions.
Pursue Growth and Protection for Your Retirement Savings, LPL Financial