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June: National Annuity Awareness Month

The National Association for Fixed Annuities (NAFA) designated June as National Annuity Awareness Month in 2010 to “help educate Americans on the important role of annuities as part of a secure retirement savings plan.”

As more and more people try to plan for their retirement, they are looking for different ways to do so. Annuities are a lesser-known retirement option.

Annuities are contracts with insurance companies. In exchange for a premium or a series of premiums, the insurance company agrees to make regular payments to the contract holder to use immediately or in the future. With an annuity, you can receive payments monthly, quarterly or annually. You can set them up to receive payments for a set number of years or for the rest of your life.

Annuities differ from other retirement plans because they do not have any contribution limits. For example, the contribution limit for both a traditional and Roth IRA is $6,000 a year. But, with an annuity, you can contribute any dollar amount you want.

The money held in an annuity contract grows tax deferred. When you withdraw the money from it, the amount contributed is not taxed, but the earnings are taxed as regular income.

The two main types of annuities are fixed and variable.

Fixed annuities

  • Provide the option for lifetime income

  • Offer a guaranteed payout, typically a set dollar amount or a percentage of the assets in the annuity

  • Have less risk since there is no exposure to the stock market

  • Can be purchased in 3, 5 or 7 year terms. Your guaranteed interest rate differs based on the number of years as well as the total dollar amount put in to it

Variable annuities

  • Have multiple investments for customizing your retirement strategy

  • Offer access to professionally managed investment portfolios, death benefits and flexible withdrawal options

  • Provide investment flexibility and growth potential for the possibility of higher returns

  • Can fluctuate in value and be riskier than a fixed annuity

To learn more about annuities and how they can add value to your portfolio, please call Ken Smith, private wealth manager at Sterling Financial Management at (301) 733-7777.

Fixed and variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

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