MEDFORD, OR—July 8, 2024—Here are five ways annuities help people save for retirement and enjoy a financially secure future once they are retired, according to retirement-income expert Ken Nuss, CEO of AnnuityAdvantage.
1. Your nonqualified savings grow faster with the help of tax deferral — hard to achieve except in an annuity. Nonqualified savings include all your money that is not in a qualified retirement plan, such as an IRA, Roth IRA or a 401(k) plan.
With nonqualified annuities, you pay no tax on earnings or interest as long as you let it accumulate in the annuity. Without federal and state income taxes dragging down your after-tax return, your money will compound faster, giving you a bigger nest egg to tap when you start taking withdrawals in retirement.
All types of annuities can help your nonqualified savings grow. For example, fixed-rate deferred annuities behave much like bank certificates of deposit (CD) but also provide tax deferrals. Below, I’ll discuss the different types of annuities and how they can be used in qualified and nonqualified accounts.
The IRS levies a penalty on any withdrawals of annuity earnings before age 59½, with a few exceptions. “Don’t put any money in an annuity you’re likely to need before that age,” Nuss says.
2. Fixed annuities boost safety and income and can be a good choice for both nonqualified savings and IRAs and Roth IRAs. Some financial pundits claim that annuities make sense only for nonqualified savings. They argue that annuities are redundant in qualified plans because these plans are already tax-deferred or, with the Roth IRA, tax-free. They may have a point regarding variable annuities. “But they overlook some key benefits other types of annuities can deliver,” he says.
A fixed-rate deferred annuity is sometimes called a CD-type annuity because, much like a certificate of deposit, it guarantees a set interest rate for a specified term. More properly, it’s called a multi-year guaranteed annuity, or MYGA. MYGAs usually pay somewhat higher rates than CDs with a comparable term. For current rates, see this chart.
So, if you’re putting some of your IRA or Roth IRA money into a CD, you can usually earn a better rate with a comparable MYGA. Additionally, with today’s historically high rates, you can lock in a high guaranteed rate for up to 10 years with a MYGA. It’s hard to find that with a CD.
3. A fixed-indexed annuity offers a unique way to get growth without risking your principal.
Growth is key to a successful retirement savings account. That means that most people, especially those in their 20s, 30s, and 40s, need to have a significant portion of their savings in equities — stocks or stock funds.
While equities have outperformed fixed-income (bonds, CDs, money-market funds, fixed-rate annuities) over the long term, they are volatile, and the market can drop sickeningly fast. Many people, especially those in their 50s and older, would like to get equity-like growth without the nerve-wracking swings.
“And that’s why fixed indexed annuities have gotten so popular in recent years,” Nuss says.
Indexed annuities credit interest based on the growth of a market index, such as the S&P 500 index. In up years, you’ll profit. In down years, you’ll lose nothing but won’t earn anything. Indexed annuities can be a great solution, especially for pre-retirees and retirees who want to save for the long term while limiting risk without precluding growth.
In exchange for downside market protection, you’ll usually receive less than 100% of the index’s gains. How much you’ll get depends on the limiting factor(s) used. It takes careful analysis to determine which indexed annuity might be best suited for you.
Some experts view these annuities as a new asset class that will produce higher returns than fixed income but lower returns than equities over the long haul. The downside is that the interest rate will fluctuate, and you’ll earn little or nothing in some years.
4. Create your private lifetime pension. The annuities mentioned above all help you grow your retirement savings while producing income. An income annuity is a different breed of cat, unique in the financial landscape.
Here, you sign over some of your money to an insurer in exchange for a contract that provides immediate or future income. Most income annuities are bought with a single premium.
With an immediate income annuity, the income can start right away. With a deferred income annuity, payments will begin on your chosen date.
You can choose to receive payments for a set term or your lifetime; most people choose the latter. “The great advantage of a lifetime plan is that you’ll get the same level of income no matter how long you live. It’s longevity insurance,” he says.
You can even choose a contract that increases future payments. If you’re married, you can buy a joint-payout version, where payments will continue as long as either spouse is living.
If purchased with nonqualified funds, a portion of income annuity payments are taxable, and the remainder is tax-free return of principal. However, if you use a lifetime annuity with a Roth IRA, the income is always tax-free.
5. Delay taking some of your RMDs and thus defer taxes on them. You must start taking required annual minimum distributions (RMDs) from your tax-qualified retirement accounts eventually. RMDs are taxable, and there’s only one way to defer them.
A qualified longevity annuity contract (QLAC) is a type of deferred income annuity that meets IRS requirements. The money in a QLAC is excluded from assets on which future RMDs are calculated. You can transfer up to $200,000 from a standard IRA or other qualified retirement plan to a QLAC.
You will choose when to start receiving a stream of lifetime income, starting no later than age 85. Deferring RMDs by up to about 12 years lets you keep more of your retirement plan intact and get more tax-deferred growth. Deferral lets you get more income when you may need it in your 80s or 90s.
While this additional income in later years is fully taxable, it’s tax you would have paid anyway, just delayed. “Since it’s a lifetime annuity, it’s a great financial safety net should you live to a very ripe old age,” Nuss points out.
A QLAC is only suitable for people who do not need all of their RMDs for living expenses.
Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. Ken is a nationally recognized annuity expert and widely published author. A free rate comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.
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