HOW ABOUT AN INVESTMENT WHICH GUARANTEES
YOU THE FULL AMOUNT INVESTED PLUS ANY EARNINGS
No, it's not life insurance. It is an annuity.
In it's basic form, think of it as the opposite of life insurance. It is the
payout of a sum of money, either a lump sum, or an amount built up over time.
Today more than ever before in our lifetime (because of the deep recession and
government hyper-debt), the lowly annuity is a great tax-advantaged product.
You may be asking, just how does an annuity work?
An annuity has two phases: accumulation and
distribution. During the accumulation phase, you make contributions (in one
payment or periodic payments) and allow the money to grow tax-deferred until you
decide to receive distributions, (your withdrawal may be subject to taxes and
penalties if you are under the age of 59 1/2).
The insurance portion of an annuity is generally
a guaranteed estate benefit and is similar to a life insurance contract. If an
annuity investor dies during the accumulation phrase, the designated beneficiary
is guaranteed to receive the full amount invested (less any withdrawals) plus
any earnings. For example, if an annuity investor passed away and the current
value of the account was less than the initial purchase payments, the
beneficiary would still receive the total amount invested. Of course, if the
current value of the account exceeded the purchase payments, the beneficiary
would receive the account's full, current value.
In addition, with an annuity, transfer of the
account to its designated beneficiary generally escapes the costs and delays of
probate.
HOW CAN ANNUITIES REDUCE YOUR TAXES
Annuities are tax-advantaged
because dividends and capital gains compound without being taxed until
you withdraw the money – similar to the IRA. However, unlike an IRA, there is
no limit to the amount you can invest each year. When you begin withdrawals for
retirement, only the annuity earnings are taxable, not the money
you have invested. As you can see from the chart below, even after taxes are
applied, the tax deferred account would still have $523,435 -- that is $180,525
more than the taxable investment.
Today's annuities aren't your father's or grand
father's fixed annuities. Now annuities are not just the ones you use to lock
in a set interest rate for a specified period of time. Annuity products
generally provide a large variety of accumulation options, often these follow
an index such as the S&P 500 or if it is a "variable annuity" they will use
"separate accounts". Typically these will mirror a selection of mutual funds.
Depending on your retirement needs and risk tolerance level, you can choose
selections which seek capital appreciation, income, or a combination of the two.
You can elect to use variable annuities which
combine the diversity of many different investment portfolios (usually mutual
fund like separate accounts) and the benefits of insurance, to provide you with
income when you need it most -- in retirement. In general, variable annuities
provide the flexibility, diversity, and growth potential of mutual funds with
the power of tax-deferred income over time. However, because of their
guarantees, they usually to have extra fees.
The more cost effective way to go are indexed fixed
annuities. These use passive means to grow your money. There is no day to day
active portfolio management (which normally incurs significant fees). Instead
the growth of your money is pegged to the performance of various market indexes,
such as the DOW Jones Industrial Index.
Tax-Free Municipal
Bonds/Mutual Funds
Retirement
Plans (e.g. IRA's)
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