here to review The Showcase List of top-selling annuities
with no load to buy and no surrender charges to sell.
If you're looking to secure your future beyond your working
years, the government wants to help. You have many options
for saving and investing your money, but when it comes to
long-term planning, the IRS has special rules that let you
save on a tax-deferred basis. Combine tax deferral with the
long-term growth possibilities inherent in stock and bond
investments and you have an ideal retirement planning vehicle
. . . you have a variable annuity. Available to anyone seeking
a retirement savings plan, variable annuities have many advantages:
deferral: You pay no tax on earnings until withdrawal.
for long-term growth of your money: You're able to invest
in professionally managed securities portfolios.
for life: You can be guaranteed a retirement income
you can't outlive.
are due upon withdrawal or distribution: A 10% federal
tax penalty may apply to withdrawals before age 59-1/2.
The questions and answers in this presentation should help
you understand more about the important role variable annuities
can play in your retirement planning.
What is a variable annuity?
It is a contract between you (the annuity owner) and a life
insurance company. In return for your payment, the insurance
company agrees to provide either a regular stream of income
or a lump sum payout at some future time (generally, once
you retire or pass age 59 1/2). Your premiums are invested
in one or more securities portfolios and fixed interest accounts,
where they earn interest and/or capital appreciation. No taxes
are due until these earnings are paid out. (If you make a
withdrawal before age 59 1/2, you could incur a 10% tax penalty.)
How does it work?
A variable annuity has two stages: the accumulation period
and the payout period. The accumulation period begins as soon
as you invest. You invest with one large payment if you select
a single premium annuity. Or you may make one or more payments
of various amounts to a flexible premium annuity. Once you
make a payment, your money begins to accumulate tax-deferred
earnings. Later, your principal and interest can be paid out
to you in the form of a regular income or as a lump sum.
What do I purchase with my premium?
Your premium usually purchases "accumulation units"
in the insurance company's separate account, which is maintained
separately from the company's regular portfolio of investments.
This separate account in turn purchases shares in professionally
managed securities portfolios. Each unit's value or "price"
is determined by the value of the portfolio, divided by the
number of units outstanding. Each unit represents a share
of the total worth of the portfolio. For example, assume a
$10 million portfolio has one million accumulation units:
Each unit has a current value of $10. If the portfolio appreciates
to $12 million, the unit value rises to $12 each. Divide your
premium by the unit value at the time you invest to approximate
the number of units you'll purchase.
What happens once I've purchased accumulation units?
The underlying securities have the potential to earn interest,
dividends and/or capital gains, which may be reinvested to
earn still more of the same. (Of course, the underlying securities
can also lose value.) Tax-deferred compounding - not paying
taxes until later - can allow the value of your annuity to
grow considerably faster than a comparable taxable investment.
What is the difference in taxation for taxable and tax-deferred
When you invest in a taxable investment such as mutual funds,
stocks or some bonds, any dividends or interest you earn during
the year are considered taxable income. Also, if you sell
the investment or the mutual fund money manager sells an investment
and gives you a distribution, you'll owe capital gains taxes.
When you invest in the underlying securities of a variable
annuity, growth is credited to your account but is not taxed
in that year. You pay taxes only on money withdrawn. When
you make a withdrawal, you'll owe income taxes at your current
rate on any portion of the withdrawal that is considered growth.
For tax purposes, withdrawals are always considered interest
first, so unless you begin to exhaust principal, you'll owe
taxes on the full amount of your withdrawal. In addition,
because the IRS set up tax deferral rules in order to encourage
Americans to save for retirement, if you make a withdrawal
before age 59 1/2, you're likely to owe a 10% federal tax
penalty on the amount withdrawn. (Only under certain IRS defined
situations, such as disability, will you be exempt from this
penalty.) If you purchase your annuity in a qualified plan
such as an individual retirement account or Keogh account,
different tax rules apply. The full amount of any withdrawal,
even an amount attributed to principal, is taxable. This is
because in a qualified plan, the contributions to the annuity
are made on a pretax basis.
What types of securities do the portfolios contain?
The majority of variable annuities let you choose among portfolios
of stocks, bonds and money market instruments. You allocate
your money to purchase accumulation units in different portfolios,
depending upon how aggressive or conservative you wish to
Who decides exactly what to invest in?
You choose the portfolios in which you will invest from among
those offered. The insurance company backing the annuity develops
a relationship with a professional money manager, whose experts
decide which specific stocks and bonds will be a part of each
portfolio. In some newer variable annuities, you can take
advantage of the acumen of more than one expert money manager,
allowing you even more flexibility in structuring your investment.
Why is it called a "variable" annuity?
"Variable" refers to the fact that the market value
and/or income generated by the underlying securities is not
fixed; your return may vary due to prevailing interest rates
and other market factors. What are the important features
of a variable annuity? Separate accounts: The variable portfolios
in your annuity are part of a separate account, established
and maintained apart from the company's general investment
portfolio. The performance of your investment does not depend
on the insurance company's portfolio. Only the performance
of the variable portfolios you have chosen will affect your
results. Diversification: Even if you invest in a single portfolio,
your risk is spread among many securities, reducing the possibility
of losing a substantial amount due to any one security. Switching
privileges: Most variable annuities permit you to reallocate
your money among the portfolios, usually without charge as
long as you don't move the money too often.
What guarantees do I have?
Guaranteed death benefit: The insurance company generally
guarantees that in the event of death before annuitization,
your beneficiary will receive the greater of a) the entire
amount of your premiums, less withdrawals, charges and fees;
or b) the current contract value. Some annuities provide more
generous options. Fixed interest options: Most annuities also
let you allocate funds to one or more "fixed account"
options in which the insurance company guarantees your interest
rate. Special programs: Some annuities go even further in
protecting against loss. They may provide a special program
in which the insurance company guarantees a return of your
premium when you place an appropriate portion of that premium
in a fixed interest option. Meanwhile, the other part of your
premium can be invested in variable portfolios that have the
potential to provide higher returns.
Can I have access to my money before I'm 59-1/2?
Yes. Most variable annuities provide for withdrawal of a
specified amount free of charge. Withdrawals in excess of
the amount specified are possible but, in the early years
of the contract, may trigger surrender charges. As discussed
previously, if you are younger than age 59 1/2, the IRS may
impose a 10% penalty tax. You may also encounter a "market
value adjustment" (MVA) if you withdraw money from fixed
interest options before the end of the interest rate guarantee
period. An MVA ensures that you receive the market value of
assets withdrawn before their maturity date and may increase
or decrease the value of your account. Finally, be aware that
some annuities allow you to make systematic withdrawals from
your account on a regularly scheduled basis, which can help
in providing you with a steady income. Systematic withdrawals
are subject to the same tax rules as other withdrawals.
What does 'annuitize' mean?
Choosing to receive payments at regular intervals over time
is "annuitizing". Most companies offer several annuity
options, based primarily on how long you want the income to
last. How is the amount of my payment/withdrawal determined
if I annuitize? First, the insurance company converts your
accumulation units to "annuity units", which entitle
you to payouts that are partly a tax-free return of principal
and partly taxable earnings. Meanwhile, the undistributed
portion of your investment continues to compound, tax-deferred.
The amount of each payment will depend on the annuity option
selected, your age, the number of annuity units and the performance
of the securities in the portfolio(s) you have selected.
Am I taxed differently on annuity payouts than on withdrawals?
Yes. Once you have annuitized, each payment is structured
as a partial return of principal and part interest. Only the
interest portion of the payment is taxable. In addition, you
can annuitize over your lifetime before age 59-1/2 and your
regular payments will not be subject to a tax penalty. You
should consult your financial advisor before deciding to annuitize.
What happens if the money is paid out to my beneficiary?
A variable annuity provides a death benefit that avoids probate
and is paid directly to your beneficiary, thereby avoiding
costs and delays. The guaranteed minimum death benefit is
generally the greater of either the total amount of your premiums,
less withdrawals, or the current value of your investments.
Some companies are more generous in their contracts, allowing
for a guaranteed increase in the premium amount or a step-up
in the guaranteed death benefit value at certain contract
years. Read the literature and contract language for the variable
annuity you choose to find out exactly what type of death
benefit the company offers.
How do variable annuities compare to IRAs?
Annuities and IRAs both provide tax-deferred growth, but
there are differences. Anyone can invest in an annuity, in
an unlimited amount. With an IRA, only those with earned income
can invest, and contributions are limited. Also, an annuity
can guarantee you an income for life; most IRAs cannot. In
addition, the IRS says you must begin taking distributions
from your IRA at age 70 1/2; most annuities do not require
you to begin taking regular payments before age 85. For information
on the tax deductibility aspects of IRAs, consult your tax
advisor. If you qualify for an IRA deduction, consider funding
your IRA with a variable annuity, which will provide the benefits
of both. If the annuity funds an IRA, IRA rules apply.
What should I consider when selecting a variable annuity?
The historical performance of the underlying portfolios,
while not a guarantee of future results, should tell how well
the annuity's investment manager has done in both positive
and adverse markets. This is more important to the growth
potential of your investment than any short-term figures.
Fees and charges should be carefully reviewed. Some annuities
have a surrender charge that declines over a number of years.
Others maintain a high charge for a stated period of time.
Be sure to look at annual administration fees and asset charges,
and find out if the insurance company charges for transfers
among the portfolios. It's important that you understand the
fees before you purchase your annuity. The soundness of the
insurance company is important. Find out whether the company
is rated "Excellent" (A) or higher by independent
industry analyst A.M. Best Company.
How can I find out whether an annuity is right for me?
You can give us a call toll free at 800-944-7730 or send
us Email at email@example.com.
We are here to review your circumstances and help you determine
what annuity is best for you. Then consider the annuity's
unique advantages - no maximum investment, retirement income
you cannot outlive, death benefit, professional management
To contact us:
Tactical Wealth Advisors, LLP
8226 Village Harbor Drive
Cornelius, NC 28031