Advice
When it comes to planning for retirement, you may feel as though you’ve already explored all your options. From traditional and Roth IRAs to 401(k) plans, pensions, and even health savings accounts (HSAs), there are all sorts of retirement funding options available.
One key—and often overlooked—part of the retirement puzzle is the annuity. These financial products are uniquely versatile and have tax benefits that often aren’t available with other retirement options. Read on to learn more about how annuities fit into the retirement puzzle.
What is an Annuity?
An annuity is an insurance product that relies on market growth to make defined future payments. But unlike pensions, which generally provide benefits based on your years of service and annual salary, annuities are endlessly customizable.
For example, if you know you’d like to receive $1,000 per month in retirement and have $250,000 to invest at a 1 percent growth rate, you can purchase an annuity that will make these payments for just over 23 years.1 That same $250,000 could provide you with $3,000 a month for 7 years. (This is a hypothetical example and is not representative of any specific situation. Your results will vary.)
Because annuities are insurance products, they build value over time—even before you begin receiving annuity benefits. This gives annuities another advantage over pensions, which may ultimately be worthless if the pension holder dies before retirement age or leaves the pension-covered job before they’re fully vested.
How Can Annuities Fit into a Retirement Plan?
There are several ways annuities can help smooth your retirement path. First, you can use them to accompany an IRA or 401(k) plan. These plans allow you to invest money in the market and then make regular withdrawals when you reach full retirement age. However, an annuity has no age limit, so diverting some of your investment funds to an annuity can allow you to receive income earlier (and thereby retire earlier).
You can also use an annuity as a tax shield for your assets. Receiving a lump sum—whether from the sale of a home, business, or other asset, an inheritance, or another source—can carry tax consequences. But putting funds into an annuity that provides a much smaller annual income (for a longer period) can address that these funds are taxed only at your marginal rate.
The tax rules surrounding annuities can be complicated, so it’s always a good idea to consult with a financial professional before diving in. They can work with you to structure any annuities in a way that helps you better position the cash in your pocket.
For more information on annuities, contact Angie Banicki by calling (574) 401-6143 or send an email to [email protected].
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Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Annuities are long-term investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuing insurance company.Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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Footnotes:
1 “Annuity calculator,” Bankrate, https://www.bankrate.com/investing/annuity-calculator/