Qualifying Annuity
Candlefocus EditorAn annuity contract simply stated is an agreement between the annuity issuer, typically an insurance company, and an individual to make certain payments for either a lump sum or for a period of time. By design, annuities provide tax-deferred savings and tends to be one of the most secure retirement options for individuals as the earnings grow over time without the need for market speculation.
Annuity contracts usually include a surrender charge, and any withdrawals from an annuity before age 59½ may be subject to a 10% penalty, although only the earnings would be subject to the penalty if the annuity was purchased with after-tax dollars.
Qualifying annuities offer key benefits and are best recommended for individuals who seek to grow their retirement savings and defer taxes until they begin withdrawing the earnings. Traditional IRAs, 401(k) plans, SEP-IRAs, university endowments, pension plans, and other qualified retirement plans can use a qualifying annuity.
A qualifying annuity has several advantages when used within a qualified retirement plan. Annuities often provide “guaranteed income” for life, flexible premium payment options, and opportunities for income growth and principal protection. Investing in a qualifying annuity can help individuals diversify their retirement portfolio and potentially reduce the risk of outliving their savings. Tax-deferral provides the opportunity to grow their income faster than taxable contributions with withdrawals occurring when their tax rate may be lower.
When used in retirement plans, qualifying annuities can offer individuals both flexibility and peace of mind. By investing in annuities, individuals earn interest income through the insurer, and the insurer guarantees a certain level of income for the remainder of their life. Qualifying annuities may be suitable for a variety of investor types including those who prefer a more conservative approach to investing, those looking to supplement their Social Security benefits, or those who simply want more control over their investments.
Annuity purchases are not suitable for everyone. It’s important to note that investing in a qualifying annuity comes with considerations including varying surrender penalties and complex details. To make sure an annuity is the best choice for both their financial circumstances and financial goals, individuals should consider consulting a financial advisor.