Annuities 101

What is an Annuity?

A fixed or fixed indexed annuity (FIA) is a financial contract between an insurance company and a policyholder in exchange for principal-protected accumulation. It does not change the tax status of the funds.

What is the Purpose of an Annuity?

Fixed or Fixed Indexed Annuities can help achieve multiple financial goals. Examples include: principal-protected accumulation (growth without risk), lifetime income streams (creating a pension), transfer of wealth, and tax deferral.

How are Annuities funded?

Annuities can be funded with Qualified or Non-Qualified Funds. Qualified funds are tax-deferred funds. Examples are 401(k), TSP, IRA, SepIRA, etc. This means that all premium and future interest earned will be taxed at some point when withdrawn. 
Non-Qualified funds are funds that have already been taxed. Examples are funds in savings and checking accounts, or CDs. The original principal is not taxed, however any future interest earned will be taxed when it is withdrawn. Roth IRAs are also a specific type of Non-Qualified account as it is after tax dollars.

 

Keep it Simple

Annuities are not different products, they are vehicles. An IRA moved to an insurance company, is still an IRA, it is not an IRA Annuity. Example: If you move an orange into a bowl, it is still an orange, it is simply in a bowl. Funds moved to an annuity offer specific benefits, such as guaranteed safety, growth linked to the market, potential to convert to a pension, etc. But it does not change the tax status of the funds.