Fixed annuities: A missing piece of your retirement planning puzzle
Increasingly, the responsibility for funding a comfortable retirement is shifting from the employer and the government to the individual. Many people contribute to employer-sponsored retirement plans and IRAs, but there is another tax-advantaged retirement vehicle you may want to consider: annuities.
Annuity essentials
An annuity is a long-term contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. It can be purchased through either a lump-sum payment or in periodic installments.
A fixed annuity earns a guaranteed rate of interest for a specified period of time. Likewise, the amount of the benefit paid out at retirement is fixed. This feature can help when plotting a budget for your later years — you'll know in advance how much regular income you will receive. However, in exchange for less risk, the fixed annuity buyer gives up the potential for a larger investment return. Conversely, a variable annuity allows the buyer to choose from a variety of investments that will change in value. A variable annuity buyer takes on more investment risk in exchange for greater growth potential.Footnote 1
A balanced view
Tax advantages — A big plus to owning an annuity is that you can accumulate money on a tax deferred basis. This means that the earnings in your annuity are not taxable until you "annuitize," or begin receiving payments — at a time when you may be in a lower tax bracket.
Generous investment guidelines — There are generally no contribution limits on annuities. This may be especially advantageous if you've fallen behind in investing for your later years, or if you're looking to minimize taxes while investing for retirement and have contributed the maximum amounts to other tax-advantaged options. Unlike other retirement vehicles, annuities may allow you to continue contributing even after you've retired and whether you have earned income or not.
Estate planning benefits — If you die prior to receiving money from an annuity, your beneficiary may still receive a death benefit, although he or she will have to pay taxes on the amount.
Fees and penalties — As with other tax-advantaged retirement accounts, you may have to pay a 10% additional tax if you withdraw money from an annuity prior to age 59½. In addition, you may have to pay a "surrender" charge to the issuing insurance company if you cancel your contract prematurely. Withdrawals of earnings are taxed as ordinary income.
Fixed annuities for retirees
Already retired? You can still purchase a fixed immediate annuity. In exchange for contributing a lump sum to a fixed annuity, you can immediately begin receiving income payments for a specific length of time. This may be beneficial to a retiree in good health who is concerned about outliving assets.
One annuity can be very different from another, and rules are complex. But if steady income and preservation of principal are goals you want to pursue, a fixed annuity may offer advantages worth looking into. You may wish to consider meeting with a financial professional to discuss your personal situation.
Merrill Lynch offers a broad range of brokerage, investment advisory and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select.
Footnote 1 Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They are sold only by prospectus. Guarantees are based on the claims-paying ability of the issuer and do not apply to a variable annuity's separate account or its underlying investments. The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of an investor's unit, when redeemed, may be worth more or less than their original value. Withdrawals made prior to age 59½ may be subject to a 10% additional federal tax. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.
Not FDIC/NCUA Insured — May Lose Value — Not Bank/CU Guaranteed — Not a Deposit — Not Insured by Any Federal Agency
© SS&C. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.
The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.
Because of the possibility of human or mechanical error by SS&C or its sources, neither SS&C nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall SS&C be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
MAP4700698-05082023