Many clients have only the vaguest notion of what annuities are and how they work.
For some clients, these instruments can be a useful source of retirement income. Here are a few basic facts that you can present to clients if they’re considering this type of investment.
– Only insurance companies may issue annuity contracts. The issuer is obligated to keep all the promises made in the policy.
– The annuitant is and must be an individual, a human being.
– The beneficiary is the party who receives any death benefit payable under the annuity.
– The owner is the individual or entity—it here it need not be a natural person—with all the ownership rights in the contract.
– There are deferred and longevity annuities. Some taxpayers purchase deferred annuity products aiming to wait until old age to begin annuity payouts; with a longevity annuity, there is typically no such choice, but these products offer larger payments for those who survive to the starting period.
– Annuities don’t only pay out during the owner’s lifetime. Death benefit, withdrawal, and commutation options now abound.
– Annuities may be purchased using tax-deferred retirement savings.
– 401(k) plan sponsors may include deferred annuities in TDFs without violating the nondiscrimination rules which normally apply to investment options offered by a 401(k).
– A grantor trust may own a deferred annuity contract.
– Taxation of annuity payments is split. The rule for taxing annuity payments seeks to return the purchaser’s investment over the payment period and in equal tax-free amounts, and to have the balance of each payment received taxed as earnings.
– Annuity contracts may be partially annuitized.
– Annuities can be part of a Section 1035 Exchange. Section 1035 of the tax code allows an annuity to be exchanged for another annuity in a like-kind exchange without recognition of gain.
For more information, please read:
The 10 Key Facts to Understand Annuities | ThinkAdvisor