
	Home\| Contact Us \| Advanced Corporate Planning

Annuities

How Money Can Potentially Grow Faster - The Impact of Tax-Deferral

One of the most important attributes of an annuity is its tax-deferred status. You don't pay taxes on annuity earnings until you make a withdrawal, which means your money has the potential to work harder and grow faster than it would in a taxable account. Leaving your money to grow and compound free from the eroding effects of current taxes can make a big difference down the road.

For example, say you invested $100,000 in a fixed annuity and your portfolio grew at a net 6% rate for 30 years. At the end of that time, after all taxes were paid on both investments, your tax-deferred account would be worth $574,349, compared to $309,699 for your taxable investment with the same return. In addition, you only pay taxes on the money taken out each year, and you are not required to begin withdrawals at age 70 1/2, as you would have to do with a traditional IRA. (This example is hypothetical and assumes a net 6% return. It is not intended to reflect actual performance of a specific investment vehicle.)

This illustration is hypothetical and is not intended to represent any particular investment or annuity product. The effective tax rate of 36% is an assumed rate.
Other state and local taxes may apply. Interest rates will vary. Tax deferred annuity products may carry a surrender charge. An IRS penalty of 10% may apply if withdrawals are taken before age 59 1/2.

The Cost of Waiting

Consider the savings habits of Jack (Jacqueline) and John, both the same age. Jack started putting $2,000 a year into a tax-deferred annuity investment when she was 20. After 10 years, Jack decides to stop investing and just let her money grow until he retires. John decides to start investing when Jack stops. He invests $2,000 a year in a tax-deferred investment from age 30 until he retires at 65. If they both earn 8% annually on their savings, who will have more money at 65?

Time and compound interest favor Jack. She will have $462,648 when she retires, while John will only have $372,204.

This is a hypothetical example and is not intended to reflect the actual performance of any particular security.

Compounding the value of a penny

A penny doesn't seem that important, but it becomes a powerful tool when used to illustrate the concept of compounding. Put a penny and a $100 dollar bill on the table in front of your friend. Ask them if they would like $100 a day for 31 days or a penny doubled every day for 31 days. Don't be surprised if they choose $100 a day. After all, that would be $3,100.

What would your friend be passing up? $10,737,418.24! This is not a misprint. A penny doubled every day for 31 days grows to more than $10 million. That's the power of compounding.

Benjamin Franklin gave a great description of compounding. "Money makes money and the money makes money."

Number Of Days	Value of $100 a day	Value Of A Penny Doubled
day 1	$100	$0.01
day 5	$500	$0.32
day 10	$1,000	$10.24
day 15	$1,500	$327.68
day 17	$1,700	$1,319.72
day 18	$1,800	$2,621.44
day 20	$2,000	$10,485.76
day 25	$2,500	$335,544.32
day 31	$3,100	$10,737,418.24

A Charitable Annuity

Charitable annuities are offered by many charitable organizations. In using this form of charitable giving, the owner of assets transfers (donates) them to the charity and the charity agrees to pay the donor or other beneficiary (beneficiaries) a lifetime annuity. The present value of the annuity contract is calculated using Internal Revenue Service tables and varies with the age of the donor and the applicable federal interest rate. A portion of each annuity payment received by the donor is taxable income. The remainder is a nontaxable return of assets.

If the fair market value of assets donated to the charity is greater than the present value of the annuity contract, the donor receives an immediate charitable deduction equivalent to the difference. If the value of the annuity contract exceeds the fair market value of the donated assets, there will be a taxable gain to the donor, a taxable gain that can be avoided by using a charitable remainder trust instead of a charitable annuity.

If the charity has an established charitable annuity program, the donation and establishing of the annuity are easily accomplished. Donors are attracted to charitable annuities when the fair market value of the donation will exceed the value of the annuity contract and the donor is receiving significant levels of taxable income. The certainty of lifetime income in combination with an immediate tax deduction make the charitable annuity particularly attractive.

In circumstances where it's likely a surviving spouse will be unable or unwilling to manage family assets, a charitable annuity or a charitable remainder trust can be a means of ensuring an income stream throughout the remainder of the lifetime of annuity beneficiary or beneficiaries.

For more or Charitable Annuities, Charitable Annuity trusts, Charitable Gift Annuities, etc. Click here

Excess of age of employee over age of beneficiary	Applicable percentage
10 years or less	100%
11	96%
12	93%
13	90%
14	87%
15	84%
16	82%
17	79%
18	77%
19	75%
20	73%
21	72%
22	70%
23	68%
24	67%
25	66%
26	64%
27	63%
28	62%
29	61%
30	60%
31	59%
32	59%
33	58%
34	57%
35	56%
36	56%
37	55%
38	55%
39	54%
40	54%
41	53%
42	53%
43	53%
44 and greater	52%

How withdrawals impact death benefits: Dollar for dollar vs. proportionate

Withdrawals can affect death benefits in one of two ways. Below are some examples of both calculations. The first scenario illustrates how withdrawals effect death benefits when there is an increase in account value, and the second scenario illustrates the impact when there is a decrease in value.

Increase in account value
Original premium:	$100,000
Current account value:	$150,000
Withdrawal:	$ 10,000
Current Death Benefit	$150,000
Dollar for dollar vs.	Proportionate
.	10,000/150,000 = 0.0666
$150,000	$150,000
.	X 0.0666
.	= 9,990
.	.
.	$150,000
- 10,000	- 9,990
$140,000 (new death benefit)	$140,010 (new death benefit)

Decrease in account value
Original premium:	$100,000
Current account value:	$ 80,000
Withdrawal:	$ 10,000
High water mark¹	$150,000
Dollar for dollar vs.	Proportionate
.	10,000/80,000 = 0.125
$150,000	$150,000
.	X 0.125
.	= $ 18,750
.	.
.	$150,000
- 10,000	- 18,750
$140,000 (new death benefit)	$131,250 (new death benefit)

¹ High water mark is the guaranteed death benefit offered in accordance with contracts terms.

It is important that you are aware of the differences described above. You should be sure to review your annuity contract to understand how withdrawals may affect death benefits. The guaranteed death benefit will vary from contract to contract. Guarantees are based on the claims-paying ability of the issuing insurance company and do not apply to the investment performance or safety of the underlying funds. Withdrawals and loans may be subject to income tax and, if made prior to age 591/2, a 10% federal penalty tax. Withdrawals may be subject to income tax and, if made prior to age 591/2, may be subject to a 10% federal penalty tax.

Benefits of Fixed Annuities

There is a lot more to a fixed annuity than just the interest rate. Just look at the other benefits a fixed annuity can provide.

Earnings grow tax deferred and are not taxed until withdrawn from the contract. Keep in mind that a 10% penalty tax may apply to withdrawals prior to age 59 1/2.
Safety of principal is guaranteed by the insurance company and subject to the claims paying ability of the insurance company.
A fixed annuity's contract value does not fluctuate with the stock market.
Current taxes may be reduced if money is moved from a taxable investment to fund a tax-deferred fixed annuity.
There are no up front fees or charges so 100% of your money goes to work immediately. However, surrender charges may apply in the early years of the contract.
Various payout options are available, including income that can't be outlived. Again, keep in mind that earnings are taxed when withdrawn and may be subject to a 10% penalty tax if withdrawn prior to age 59 1/2. Surrender charges may also apply if the money is withdrawn in the early years of the contract.
Proceeds can be paid directly to a named beneficiary and may avoid the expense and delay of probate.
Special withdrawal provisions may be available to help you in the case of confinement to a nursing home.

Are you a potential fixed annuity customer?

You know you are a potential Fixed Annuity customer when you...

Are retired or nearing retirement age.
Are looking for guarantees.¹
Are averse to risk.
Are concerned about paying taxes.
Want a consistent return on your money.
Have certificates of deposit.²
Want access to your money in times of an emergency.³
Want to minimize estate administration headaches for your loved ones.
Want a regular source of income.
Already have a fixed annuity. You may want another fixed annuity.

Contact Advanced Corporate Planning to learn more about Fixed Annuities

NOTES:
1. Guarantees are based upon the claims-paying ability of the insurance company.
2. Remember, unlike many CD's, annuities are not insured by the FDIC.
3. Withdrawals and loans may be subject to income tax and, if made prior to age 59 1/2, a 10% federal penalty tax.

Protect Your Retirement Plan With Fixed Annuities

Admitting there is a better way of doing things is not always easy. Yet not learning from life's experiences can prove to be even more difficult. With this in mind, investors should consider the benefits of fixed annuities.

How can fixed annuities help your retirement plan? By guaranteeing income. Although the amount will depend on many factors, including your life expectancy and the fixed rate of return on your investment, you are still guaranteed one check every month for as long as you live. When you buy an annuity, you enter into a contract with a life insurance company that says you agree to pay the premium and the company agrees to provide benefits, including guaranteed return of principal, tax-deferred interest and a death benefit, in addition to assured income.

Although there are many types of annuities, and each has its own advantages, fixed annuities allow you to invest at a guaranteed basic interest rate while the earnings grow tax-deferred. As an added bonus, the insurance company guarantees the full amount of your premium - minus any withdrawals - and the interest.

There are many caveats when considering any investment. When investing in annuities, the amount of income tax due upon withdrawal, the absence of a tax deduction on contributions and potentially high fees charged by the insurance company are all factors to consider. Fixed annuities may be the low risk solution to your investment needs.

Annuities and probate

Probate. It can be a long and costly legal process, typically lasting six months to two years and costing as much as 5 to 10 percent of the probate estate before the decedent's financial affairs are resolved and assets distributed. In planning how to pass wealth on to your heirs, choosing assets that can avoid the probate process can ultimately retain more wealth.

Annuities - tax-deferred, long-term vehicles for asset accumulation - are one option for possibly avoiding the probate "pinch." In addition to tax deferral, annuities offer insurance features such as living benefits and death benefits. Though there are additional fees and surrender charges associated with annuities, their inclusion in your portfolio may be advantageous in many circumstances, including avoiding probate.

In the probate equation, proper structuring of the annuity contract is vital. If the contract is structured properly, the value of the annuity can be excluded from the owner's probate estate. Keep in mind though that the annuity's value and almost all assets are not excluded from the taxable estate. Based on the terms of the annuity contract at the time of the owner's (or sometimes the annuitant's) death, the annuity's value can pass directly to the designated beneficiary without going through probate. Accordingly, payments from that annuity will not be subject to probate.

ANNUITIES + PROPER CONTRACT STRUCTURE = NO PROBATE

NOTE: ALL information contained in this site is for illustration purposes only, and by NO means should be considered individual tax or legal advice under any circumstances whatsoever!

Lynn R. Siewert AIMC
Pension Consultant | Branch Manager
CA Insurance License #00B00579
2005 E. Evergreen Blvd
Vancouver, WA 98661
Ph: 360-750-9626

Securities Offered Exclusively Through
First Allied Securities, Inc. Member FINRA/ SIPC
All other products and services provided exclusively through Advanced Corporate Planning

This site is published for residents of the United States only. First Allied Securities' Financial Advisors may only conduct business with residents of the states for which they are properly registered. Therefore, a response to a request for information may be delayed. Please note that not all of the investments and services mentioned are available in every state. Investors outside of the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. Contact your local First Allied Securities office for information and availability.