An Annuity works best when bought within a Roth account where it can provide a lifetime of inflation-adjusted tax-free income.
Fixed Index Annuity (FIA) benefits can be divided into four categories: Asset Growth, Asset Safety and Access, Tax Benefits, and Insurance Protection.
Asset Growth: With an Annuity, you can beat the longevity risk (explained further in our blog “Longevity Risk”), which is the risk of outliving your savings. It is a self-sponsored pension plan that provides a lifetime of inflation-adjusted income. An Annuity investment allows you to realize market return without being directly invested in the market. However, the upside potential is limited with a cap, spread or a participation rate (see “How Index Crediting Works” for more details), while the downside risk is limited to 0% return. As a result, you trade a few points in market return for a much lower volatility. In fact, adding an annuity to a portfolio lower the overall portfolio volatility. Please refer to “Annuity Moves Efficient Frontier” for industry research done in this area. The investment is professionally managed. Fees are usually baked into the index credit rates in competitive products. Our blog “How An Annuity Works” explains a good Annuity investment by using an example.
Asset Safety and Access: Principal protection is a hallmark benefit of FIA (not for Variable Annuities). If the market turns negative, the policy value stays flat with a 0% return. Cash Value (CV) provides liquidity through free withdrawals, typically limited to 10% annually. Income stream can never decrease in value, but competitive products will adjust the income up with a positive market return, acting as a good inflation-hedge. Annuity assets are not typically subject to Probate process.
Tax Benefits: Annuities allow money to grow tax-deferred, but when funded with a Roth IRA, income is also tax-free. Annuities bought with other funding sources have different tax liabilities which are covered in our blog “Annuity Tax Implications.”
Insurance Protection: Though not a typical insurance product, Annuities do provide a death benefit if there is any account value still left in the policy. They also provide living benefits for critical, chronic and terminal illness.
We specialize in tax-free retirement strategy and investments such as IUL, Annuity and LTC. Prefer a quick and complimentary consultation? Just email us at Karthik@FinCrafters.com
