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This website is not meant to be tax or legal advice and that everyone should seek tax or legal advise from their tax or legal advisors.
Annuity products
What are annuities?
Annuities are an investment vehicle that you control how much money is put into it and also how you are paid on the return that it makes.
What different kinds of annuities are there?
Fixed Annuity:
A fixed annuity provides a guaranteed interest rate* for a fixed period of time. Here's how it works: You give a check to an insurance company and they invest it. If their investments do poorly, they will still pay you the interest rate they promised. The interest rate you are paid will be periodically adjusted up or down, but it will never go below the guaranteed rate.
Immediate Annuity:
With an immediate annuity, you begin receiving payments within one month or up to 12 months from your annuity purchase date, depending on when you want to start this income stream. When purchasing an immediate annuity, you can tailor it to fit your personal needs, which includes choosing a payment option and the frequency of the payments (monthly, quarterly, semi-annually or annually).
Market Value Adjusted Annuity:
Market value adjusted annuities can help you get a variety of interest rates. With these plans, you can divide your money over several different contract periods, each with its own rate of interest. During each contract period, you may choose to take cash from your account when prevailing interest rates are favorable for a withdrawal. Market value adjusted annuities have a greater potential to provide higher interest rates than the traditional fixed annuity.
What is a Traditional IRA (Individual Retirement Accounts)?
Some people assume that if their employer doesn't offer a 401(k) or 403(b) plan, they have no tax-deferred way of saving for retirement. Not true. The government wants us to save for retirement, so anyone with earned income can open a traditional IRA for 2003. The maximum contribution is $3,000 per person ($6,000 per couple). If neither spouse participates in an employer sponsored retirement plan, then the entire traditional IRA contribution is tax deductible. If one or both spouses participate in an employer sponsored retirement plan, then the amount of any contribution to a traditional IRA that is tax deductible will be subject to certain income limits. If you are age 50 or older, then you can make an additional "catch-up" contribution to your traditional IRA.
You can open an IRA with a broker or through many other financial services providers, such as banks and insurance companies. Most financial services providers require only a small amount to open an IRA if you agree to make regular contributions (usually monthly). You may be able to arrange for money to be automatically deducted from your checking account and deposited in your IRA. Depending on where you open an IRA, you may have a wide variety of investments to choose from, including stocks, bonds, and mutual funds. Learn a little about investing and choose your IRA investments carefully. Or consider talking to a financial professional for help selecting them.
As with 401(k) accounts, the money you invest in a traditional IRA grows tax-deferred. Eventually you will pay taxes on your contributions and earnings. But when you withdraw it after the age of 59 ½, it may be taxed at a lower rate, especially if you have already retired and are no longer receiving a regular paycheck. If you withdraw money out of your IRA before the age of 59 ½, you will owe income taxes and may owe an additional 10% penalty on the money. You can also be penalized for keeping money in your IRA for too long. If you do not start taking withdrawals by the age of 70 ½, you could face a heavy penalty of as much as 50% of the amount you were supposed to withdraw.
What happens if you die before you start withdrawing money from your IRA?
If you're married and your spouse is your beneficiary, he or she will have several choices as to how to take distributions from your account, including the ability to roll over the account into his or her own name. Other heirs have similar choices but cannot roll over the account into their own names.
What is a Roth IRA?
What about people who cannot make a deductible IRA contribution? As long as your adjusted gross income is less than $110,000, if you are a single tax filer ($160,000 if you are married and filing jointly), you can open a Roth IRA. As with traditional IRAs, you can open a Roth account with a variety of brokers and financial services firms and arrange for an investment plan that meets your needs.
The tax rules for investing in a Roth are different from the rules for traditional IRAs. Instead of getting a current tax deduction, you invest after-tax dollars in a Roth (up to $3,000 per year or $6,000 for couples). But you won't have to pay taxes on your earnings if you hold an account for at least 5 years and start withdrawing it after the age of 59 ½. Because a Roth's tax break comes later, many people who anticipate that they will have significant income when they are older prefer Roths to other retirement investment plans.
Roths are also more flexible when it comes to withdrawing money. You never have to start taking withdrawals from your account during your life if you don't want or need to. And you can withdraw the money you've contributed to your account at any age without penalty, because you've already paid income taxes on it.
It's also easier to transfer a Roth account to your heirs when you die. As long as you've had your account for at least five years, they won't owe income tax on your contributions or your earnings.