In the wake of the financial crisis of 2008 and the global pandemic that has cut down our 401ks, the safety of an income stream that will guarantee payments look more and more attractive every day and the benefits of an annuity are hard to ignore. The term annuity refers to an insurance contract issued by a financial institution with the intention of paying invested funds in a fixed income stream in the future or immediately after the initial payment. When considering your options, it is vital to understand how each product can help you reach your financial goals. Just like an IRA, a 401k, and a savings account, we should not overlook annuities simply because we know little about them. After all, it is your hard-earned money! Why would you not make it work for you? Today’s article covers several key benefits to help you navigate this practical investment contract.
Benefits of an Annuity: No Limits On Contributions
There are no IRS limits on the amount of money contributed annually to an annuity. The IRS puts a cap on the amount of money you can put into a 401k account for the year 2023 to $22,500. The maximum amount you can contribute to an IRA for 2023 is $6,500 or $7,500 if you are age 50 or older. You can max out the contributions to your IRA and your 401k; if you still need to save even more, you can contribute to an annuity. Your current and potential future financial needs, your long-term financial goals, and your current savings and investments will determine the amount of money you should consider putting into either a deferred or an immediate annuity.
Benefits of an Annuity: Tailored Solutions
Annuities come in different types, and you can choose one to fit your needs and budget. There are immediate annuities that have a single premium and begin paying out immediately after paying the lump sum. Deferred annuities provide payments in the future and allow the principal to grow with additional contributions and interest over time. Fixed annuities ensure a buyer a guaranteed interest rate on their contributions to the account. Then there are variable annuities that pay interest based on the performance of an investment portfolio elected by the annuity buyer. Annuities may also include an array of riders. These riders may feature a guaranteed payout amount, an increase in payments for specific medical conditions, and payment options to beneficiaries in the event of death.
Benefits of an Annuity: Tax-Deferred Growth
The money you contribute to an annuity grows tax-free. That’s right, tax-free! You will not be subject to taxes on any interest you earn until the annuity begins to pay out the funds. Typically, this occurs when you retire or when the annuity contract begins to pay out. A fixed annuity is a tax-qualified investment vehicle. The earnings it produces grow and compound in a tax-deferred way, and the owners are only taxed when they take money out of the account. This investment can be huge for allowing your money to have more growth potential because less of the interest gained pays toward any taxes owed. Once you retire, if you fall into a lower tax bracket and earn a lesser income, you may even be able to pay less.
Finding the right tools and the right place to invest can be a daunting task. We are here to help you with all the tools to learn and conquer your retirement. If you want to understand more about annuities and how they fit into your plan for retirement, give us a call today. Also, you may want to read about staying fit to enjoy more of the best years of your life.
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