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Providing for honest things, not only in the sight of the Lord, but also in the sight of men. II Corinthians 8:21 |
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Annuities in Today's Market
Annuities, with their promise of "an income you can't outlive," have always been popular with people as a way to help fund a retirement. In the past, annuities have been conservative, safe, and guaranteed but not very exciting. Today more and more annuities are competing with stocks, bonds, mutual funds and bank CD's. Let's look at some of the benefits annuities offer in today's market. Then, we will look at some of the popular types of annuities and their uses. One of the great advantages of annuities is the fact that the earnings credited to an annuity each year are not currently taxed as income. This tax-deferral feature, along with the power of compounding, make annuities very appealing. Investors may see hundreds of dollars going out each year to pay federal income taxes on their investment income. If they bought an annuity, those tax dollars would still be working for them, earning more money inside the annuity. Income taxes won’t be payable until distribution payments are made from the annuity, usually when the owner is retired and in a lower tax bracket. Most investors are attracted to the safety features of an annuity. Insurance companies are required by state regulation to maintain adequate reserves to fund their contracts. Independent rating agencies investigate the insurance companies and publicly rate these companies on their financial strength. State Insurance Departments regularly examine insurance companies to assure the companies are conforming to regulations and are financially stable. Most deferred annuities now allow the annuity owner, after a specified period, to withdraw part of the cash value without paying a withdrawal charge. The amount may be the annual growth in the policy or up to a portion (usually 10%) of the policy's cash value to be withdrawn with no withdrawal charge. Annuities do not have to go through probate when the owner dies. Death proceeds are paid immediately to the named beneficiary(ies). In many states, legal fees can make the probate process very expensive, reducing the amount the heirs will receive. And, in some cases, the probate process is drawn out for years delaying the distribution of the estate. The value of the annuity generally is included in the deceased policyowner's estate for estate tax purposes but not subject to probate proceedings. Avoid Taxes on Social Security Benefits If a couple, filing jointly, has income of more than $32,000 a year (including half of their Social Security benefits, any wages, pension benefits and investment earnings), they will have to pay tax on up to 50% of their Social Security benefits. And, if that couple's income exceeded $44,000, up to 85% of their Social Security benefits will be taxed. For a single retiree, the 50% threshold is $25,000 and the 85% threshold is $34,000. By purchasing an annuity and reducing unearned income of the couple/individual, total income could fall under the threshold amounts, leaving Social Security benefits untaxed.
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