Monday, April 30, 2012

Annuities


Today at Ameriprise the main focus was on learning about Annuities. This is a financial product designed to pay out steady amount cash over time. It is used as a retirement vehicle to insure regular income in later years. It is a contract between the client and a financial institution, which agrees to pay a lump sum up from or monthly deposit. The financial institution agrees to pay money on a particular date and to continue over a fixed period, like 20 years or until the client or their spouse dies. These payments are called distributions. This type of retirement plan helps to put clients into a 5% tax bracket, which enables both themselves and their financial advisor to keep more money. Annuities can be either fixed or variable. A fixed rate can range around the 3% - 4% while a variable will depend on the economy.
            A fixed annuity offers you a very low-risk retirement; a client will receive a fixed amount of money every month for the rest of their life. However, the price for removing risk is missing out on growth opportunity. Should the financial markets enjoy bull market conditions during your retirement, the client will forgo additional gains on their annuity funds while variable annuities allow less risk-averse retirees prolonged exposure to the financial markets. 
           This type of retirement plan is classed as non-qualified as it can occur outside their IRA. If a client withdraws money before the fixed annuities period is up then they will have to pay surrender charges. If a client dies then their annuities can be inherited to their children. Their children will have three options in which to accept the money. They can receive a lump sum, which would involve paying taxed on the gains, which may be as much as 25% - 28%. The next option is receive the money in a stream of income enabling them to pay a smaller tax bracket and the final options allowed them to continue with the contract, receiving the money just as the original living client would have. The option best for the client would depend up which effect tax bracket was best. This is worked out via the formula = Tax paid divided by adjusted gross income.
            Annuities offer tax-sheltered growth, which can result in significant long-term returns for a client if they contribute to the annuity for a long period and wait to withdraw funds until retirement. Annuities are good for clients who wish to have a retirement fund which will give them peace of mind as they guarantee income stream, and the tax benefits of deferred annuities can amount to substantial savings. 

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