Save
a Little Extra with an Annuity
Most retirement savings plans today offer a range of appealing features, including
tax deferral of any potential earnings. However, one key drawback is that the
tax code limits how much you can contribute each year. Even though the
contribution limits are scheduled to increase slowly over the coming years, some
investors might find that the new limits are still too restrictive.
What if you need to save even more to meet your retirement goals — or don’t
like the plan your employer offers? The answer could be an annuity.
Annuities offer the potential for tax-deferred earnings and have no federal
contribution limits.1 They can be used alone or
in conjunction with other retirement savings plans. In addition to these and
other benefits, annuities offer flexibility and choice.
There are two basic types of annuities. A fixed annuity guarantees a
fixed rate of return for a specific period, no matter what happens to the
economy or the financial markets.2 A variable
annuity enables you to participate in the markets by placing money in your
choice of subaccounts, which can be invested in stocks, bonds, and cash
equivalents to pursue an investment objective of your choosing.3
There is usually greater potential for gains with a variable annuity, but you
also must bear the investment risk.
With
either type of annuity, your contributions are invested during the accumulation
phase. Any earnings grow tax deferred and are taxed as ordinary income when you
begin making withdrawals.
When you retire, there are several options for receiving your money. You can
choose an income for your life, or for your life plus the life of a person of
your choosing. You may decide to take a lump-sum distribution, or even leave the
money invested as a cushion in case emergency expenses arise.
Retirement savings plans can play a key role in a portfolio. However, if they
fall short of helping you reach your goals, you may want to review the benefits
of an annuity.
1–3) The guarantees of
fixed annuity contracts are contingent on the claims-paying ability of the
issuing insurance company. Annuity withdrawals are taxed as ordinary income and
may be subject to surrender charges plus a 10 percent federal income tax penalty
if made prior to age 59˝. Surrender charges may also apply during the
policy’s early years. Generally, variable annuities have mortality and expense
charges, account fees, investment management fees, and administrative fees.
Variable annuity subaccounts fluctuate with changes in market conditions, and
when surrendered, the principal may be worth more or less than the original
amount invested. Variable annuities are long-term investment vehicles designed
for retirement purposes. They are sold by prospectus only. Be sure to read the
prospectus carefully before deciding whether to invest.
© 2002
Emerald Publications
