Fixed annuities are designed to help you reach your long-term goals by providing a guaranteed return for a set period of time. They may be a good addition to a retirement strategy, but it’s important to understand how they work.
When you invest in a fixed annuity, you pay a lump sum to an insurance company. They then guarantee a stated rate of interest over a specific period of time. The interest accumulates on a tax-deferred basis, meaning you do not pay tax on the interest until you withdraw it or take it as income.
There are several key features to consider with a fixed annuity.
Tax-deferred accumulation
Generally, fixed annuities are purchased with a single payment. The account value grows tax deferred at the guaranteed rate. When you decide to take the earnings, they are taxed as ordinary income.
Choice of guarantee periods
Your money is invested for a specific period of time, which you select based on your investment time horizon.
Guarantee of interest and principal
The value of your fixed annuity increases when interest is added to your contract.
Flexible income options
You can take income from a fixed annuity in a number of ways:
- All deferred annuities can be converted to a lifetime stream of income.
- You may also have the option to take systematic withdrawals, the amount of which can be adjusted at any time.
- Some fixed annuities enable the policyholder to elect an optional living benefit. Such benefits can provide certain guarantees for contract withdrawals for life. These benefits may require additional fees, charges, or expenses, and may be subject to eligibility limitations.
Avoiding probate
Fixed-annuity proceeds paid to the beneficiary upon death are excluded from estate probate. However, any tax-deferred earnings in the contract will be subject to ordinary income tax, and estate taxes would apply to the total value of the contract, if applicable. The payout at death is generally the accumulated value without any imposed charges or market value adjustment.
