Deferred Annuities: Save Money and Get Tax Breaks

Most people would agree on two things, they want to save money and they want tax breaks. That is why a deferred annuity is a great investment in your financial future.

A lot of people are worried about what they are going to do when retirement age comes. The Social Security system is unstable. Plus, many people aren’t paying enough into it to retire properly. For those who have the money now, they should start thinking about other ways in which to save. Personally, I love the idea of a deferred annuity.

Yet, you need to do some thinking and investigating before you simply buy the annuity. You need to shop around for the best deal for your money.

If you don’t know where to go to buy a deferred annuity (most banks do not offer them), you should first contact your state Department of Insurance. They can give you names and the ratings of insurance companies that offer deffered annuities. You should also check and see how long the company has been in business. A company that has been around for twenty years is definitely a more stable company than one that has just opens its doors.

Next, you need to decide how much you are able to invest. You want to invest enough to make money, yet you don’t want to invest all of your nest egg. Things come up, life happens. You need to be prepared for emergencies. Once you invest in a deferred annuity the annuity will be held for so many years, depending on what you set (most annuities are set for 10 to 20 year span) If you take out all or part of it, you will suffer penalties and loose money, this is not your goal.

After you do the math and decide on the amount you want to invest, next you need to think about what type of interest you want. Most companies have several options. One option is the fixed interest rate. This means your interest will be based on what the interest is the time you set up the annuity. It will not matter if the interest rate raises or falls, yours is all ready set. The other is a variable interest rate. This means the interest rate can either raise or fall. Each method has its own advantages and disadvantages. If you choose the fixed interest rate, you know what you will get each period and for some it is unnerving to watch the rates raise and fall. Yet, by choosing this method your annuity may not keep up with the cost of living increases. For this reason, some companies even offers you the option to put so much of your interest in a fixed rate setting and so much in a variable rate setting. When doing this you have the best of both worlds. Yet, the choice is yours.

After you decide what type of interest rate you want, you should decide what to do with your interest. You can have the interest sent to your in a form of a check each period, deposited into another account or even have it rolled back into your annuity, which would mean the amount you invested will continue to grow. What you do is your decision. Each insurance company will have different options on how to do this. Be sure that you understand all the options you have.

You also need to see if the insurance company you plan on using has any other fees. Some have contract fees and maintenance fees. Make sure you understand everything before signing.

Another important step is to make sure you are clear as to what happens to your money if you should die before the annuity completely matures. Most people want the money to go to their heirs. Make sure this is done in writing. If not, the money could end up in the hands of the insurance company.

Now if you wonder what happens each year at tax time, it is simple. You only have to pay taxes on any interest you actually withdrawn. This means if you had your interest deposited into a check or another account, you are responsible for the taxes on that interest only, not the annuity itself. If you had the interest rolled back into the annuity (meaning you did not pocket any of the interest yourself) you will pay no taxes on it.

You will have to pay taxes when the annuity matures. But that will be several years down the road.

The best advice any one can give a person when it comes to investing is to do your homework and don’t be afraid to ask questions. No question is a dumb one. After all, you are planning for your future and the future of your family’s, not the insurance companies. Plus, without customers like you, remember they wouldn’t even be in business.

Good luck and happy

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