Pension Plans (Annuities)

What are Annuities?

Annuities are financial products offered by insurance companies designed to provide a steady stream of income, typically during retirement. The main driving force for annuities is to help protect you from the risk of outliving your income, with a guaranteed retirement paycheck for lifetime, which could include you and your spouse.

What Are Fixed Indexed Annuities (FIAs)?

FIAs are a type of annuity contract that combines elements of fixed and variable annuities. They offer a guaranteed minimum interest rate while allowing additional returns linked to the performance of a specified market index, such as the S&P 500. However, unlike investing directly in the market, FIAs protect your principal from losses, even if the index performs poorly.

When Fixed Indexed Annuities (FIAs) might be necessary:

  • You’re concerned about running out of money in retirement.
  • You want to protect your retirement savings from market downturns.
  • You want to diversify your retirement portfolio.
  • You need predictable, guaranteed income to cover essential expenses.
  • You’re looking for a tax-deferred growth option without annual contribution limits. 
FIAs are not a replacement for 401(k)s or Roth IRAs but rather a tool to supplement and diversify your retirement strategy. They provide unique benefits that can fill gaps in traditional retirement accounts.
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Benefits of Fixed Indexed Annuities

Market-Linked Growth Potential

FIAs provide the opportunity to benefit from positive market performance through index-linked credits. While they won’t capture full market gains, they offer more growth potential than traditional fixed annuities.

Principal Protection

The most attractive feature of FIAs is that your principal is shielded from market downturns. Even during periods of negative index performance, your account value remains unaffected.

Tax-Deferred Growth

Earnings within an FIA grow on a tax-deferred basis, meaning you won’t pay taxes until you start withdrawing funds. This allows your investment to compound more effectively over time.

Lifetime Income Options

Many FIAs come with optional riders that provide guaranteed lifetime income, ensuring you won’t outlive your savings.

Customization and Flexibility

FIAs often include a range of options for contract terms, withdrawal provisions, and income riders, allowing you to tailor the product to your specific retirement needs.

Frequently Asked Questions

A Fixed Index Annuity (FIA) can be funded in several ways, depending on your financial situation and the terms offered by the insurance company. Here are the main options:

  1. Lump-Sum Payment

You make a one-time premium payment to the insurance company. This is the most common way to fund an FIA.

  1. Periodic Contributions

Some FIAs allow you to make multiple contributions over a certain period, either as scheduled payments or as additional lump sums.

  1. Rollover from a Retirement Account

You can fund an FIA using money from qualified retirement accounts like a 401(k), 403(b), or IRA. This is often done via a direct transfer or rollover to maintain tax advantages.

  1. Reallocation of Non-Qualified Funds

You can use non-qualified funds, such as savings or proceeds from other investments, to purchase an FIA. The interest earnings are tax-deferred until withdrawn.

  1. 1035 Exchange

If you own another annuity or a life insurance policy, you may be able to transfer its cash value to an FIA using a 1035 exchange. This is a tax-free transaction, provided it complies with IRS rules.

No, you won’t lose your principal due to market fluctuations. However, fees, withdrawals, or surrender charges may reduce your account value.

Gains in an FIA grow tax-deferred, but withdrawals are taxed as ordinary income. Early withdrawals before age 59½ may also incur a 10% IRS penalty.

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