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Understanding the Imposed and Not Imposed Taxes on Fixed Annuity Investment

It is very important to know what taxes you are supposed to pay from your annuity scheme. Otherwise, you might be labeled as one of the people who evade their tax obligations. Consequently, that can have bad results on your image or even some legal consequences. Therefore, at what point will you have to pay taxes within a fixed type of annuity?

To begin with, there is the need to understand that this type of annuities has two phases, which have different tax rules. The first phase is called the accumulation period. In this time, you are not supposed to withdraw large parts of your principal. It is supposed to grow for your later use. However, investors are allowed to withdraw up to 10% of their invested money every year. Therefore, when someone withdraws more than this amount, there is always a tax penalty of 10%. Other than that amount, you are not supposed to pay any other tax on either the principal or the earned interest.

RetirementInvestmentThe second phase of a fixed annuity is the distribution phase. During this time, you will decide how you will receive your payments from the insuring firm. This could be done periodically or as a lump sum. Irrespective of the method that you choose to receive your payments, you will be required to pay taxes on the interest amounts. This happens in different ways. One, when you receive a lump sum payment from your annuity, your principal will not be taxed but the interest earned will be subjected to the regular income tax rate. Two, for periodic payments, you could pay taxes on every payment that you receive or after receiving the entire principal.

With the first option, the insurer calculates the distribution amount of your invested money. You are not taxed on this payment. However, anything above that requires that you pay a tax at the rate of regular income. The second option means that you may not pay any tax for the payments received until they total to your principal. After that, you then start paying fixed annuity taxes.

Apart from these taxes imposed on the annuitant, most people would love to know if beneficiaries of a fixed annuity pay any taxes. Firstly, let us understand who a beneficiary is. A beneficiary is the person whom an annuitant names to receive payments on his (annuitant’s) behalf in the event of death before receiving all the payments. Depending on the agreement in the contract, the beneficiary can receive only the balance for the invested money or he could receive even the accumulated interests. Moreover, he usually has the choice of receiving the money either as a lump sum or as periodic payments.

For the beneficiary who receives only the principal amount of the deceased annuitant, he does not pay any taxes for fixed annuity. However, for the one who receives both the principal money and the earned interest, he has to pay some taxes. This is irrespective of whether he receives the payments as a lump sum or as regular payments; he has to pay taxes on the interest amounts just as he would on any other ordinary income tax. In other taxes, beneficiaries who have high incomes could be subjected to higher tax rates. In such cases, it is advisable not to annuitize but rather transfer the funds to another contract, which you will own.

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Discovering the Benefits of Fixed Annuity Selling

An annuity is usually an investment contract, which involves an individual investing his money in a financial institution. The most important reason for these contracts is the security of someone’s retirement. With the fixed option of annuities, the investor usually receives the regular payments from his invested money and interest after he retires until he passes on. However, there comes a point that some investors, which you could be part of, become unappreciative of this payment procedure. This is because there is a more urgent need that cannot be sorted out by the regular payments. Let us see some of the reasons that prompt people to sell their annuities as well as how they benefit.

There are times that we find ourselves overwhelmed by our bills. Failure to pay them within some specified period usually results in embarrassing acts such as auctioning of your assets or termination of some services. The challenge sets in when you find that the rate of annuity payments does not suffice the clearance of these bills. Therefore, the next better option becomes selling the retirement plan. Doing such a thing helps you to clear your urgent bills. However, caution should be taken in this scenario. It is highly advisable to do this only if you have another source of income, which will sustain you during your retirement days.

The second reason for an investor to dispose his fixed annuity is to be able to invest in other lucrative areas. Even though these annuities will earn some interest, it might not be satisfying for people in search of financial success. Therefore, when an opportunity to make much money arises and you find yourself in need of capital, then annuity selling becomes a justified action. In this case, you will be able achieve the success that you desire in increasing your finances exponentially rather than sitting back as you wait for some regular payments.

When people retire, they might want to live in a new neighborhood or even buy a house since they were living in rented apartments. This may be a worthy reason for anyone to look for a lump sum for his or her annuity. In doing this, someone is able to stay peacefully so long as there is a contingency plan for other sources incomes.

One of the challenges that some investors cite when it comes to a fixed annuity investment is the rigidity of the scheme. There are fixed dates for withdrawals, fixed charges and fixed payment periods. Therefore, people who fail to appreciate these situations usually end up selling their annuities. In such a case, you will get your money and the opportunity to manage your funds just as you would like to.

Once you find out that you want to sell your annuity, you have to proceed with caution during the selling process. The first step is always to conduct a good research on a good firm that can handle the transaction for you. Goodness will depend on the quotation values and the discounts requested by various agents. Moreover, you need a firm that has experience in that area of business such that you can have the surety of successfully selling the annuity.

Then you need to decide the percentage of the investment that you need to sell. You may choose to sell all of the investment scheme or part of them. Then, identify the firm that will handle the transaction on your behalf. Thirdly, make sure that you have all the documents regarding your investment. These will include policy document, a check for your payment and identification forms. Then have some patience as the agent will advise since the process usually takes some time.

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The Basic and Complex Terms on your Fixed Annuity Contract

When you want to invest in an annuity, especially the fixed option, you will want to have high minimum interest rates and the best conditions as well. This is all right because no one would mind having high incomes. The obvious question is how someone identifies a food firm that offers such features. One, you can visit all the websites for the insurers that you would like to invest in. However, this will require a lot of time. Two, there are insurers and agents who can give you this information from their websites. This is a great option because it will save your time. Apart from the term interest rate, your contract will have other terms that will refer to different rates. You need to understand what they mean. Following is a discussion of these terms.

a)            Bailout provision

Fixed types of annuities have minimum interest rates, which are revised annually. Therefore, they can increase or decrease. Bailout provision is the feature in your contract that protects you from surrender charges. This happens when you withdrawal your money during the accumulation period, which happens when the minimum rate falls below a specified level.

b)            Bonus rate

This is the amount of interest earned by your premiums, which is then added to your premium so that it can earn more interest for you. This is an important feature to look into because it determines how fast your money will increase.

c)            Effective annual yield

This is the minimum interest rate of a fixed annuity investment, which is usually a result of averaging daily interest rates. The daily rates are credited and compounded every day.

d)            Yield

Every annuity will have a certain rate for the return of investment. It is expressed in terms of the current price’s percentage.

e)            Lifetime guarantee for a minimum interest rate

When you sign a contract for your annuity (fixed option), you will have a minimum interest rate for your principal for the duration that your contract is active. This interest rate is sometimes referred to by this term.

f)             Annuity with a guarantee for multi-year interest rate

Even though most fixed annuities review their minimum rates every year, there are some options where you can get a guarantee for some minimum interest rate for a number of years. An annuity in this category is referred to by this term.

g)            Actuary

There are times that you might want an individual to help you understand or calculate some annuity rates. The person right for such a job is called an actuary (someone who has studied actuarial science).

h)            Annual percentage rate

This term refers to a consumer’s loan cost when expressed in terms of basic annual percentage amounts.

i)             Certificate annuity

This is a type of a fixed annuity. It assures you of a minimum interest rate for a period whose length is the same as the period during which a surrender charge was active.

j)             Initial interest rate

With deferred types of fixed annuities, you can deposit you principal over a long period. The first deposit will have an assured minimum interest rate, referred to by this term. This rate will extend for the period defined in your investment contract.

k)            Market value adjustment (MVA)

This is one of the fixed annuities. It gives an assured minimum rate so long as you do not withdraw funds exceeding the specified free-withdrawal amounts or decide to breach the contract while it is still active.

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The Pros and Cons of Fixed Annuity – What to Consider Before Investing

The most important reason for any investor when he is putting his money in some enterprise is to make more money. Such an action requires sufficient research before getting started. The same case would apply for a fixed annuity investment. Its advantages will motivate you to go ahead with your plans while its disadvantages would help you know how best you can prepare for such situations. Let us first have a look at the advantages of this investment scheme.

The first benefit of these schemes is that they will most likely earn money for you without payment of taxes. This is an illegal tax evasion. Therefore, the authorities will not come looking for you claiming that you have broken any tax payment law. Luckily enough, being on this scheme helps in maintaining your good reputation. On the same note, the money that would have gone into tax payment will remain in your account. Consequently, it will also earn more interest for you. Actually, calculations show that the unpaid taxes contribute to 45% of all the earned interests, which sums to quite a lot of money.

The second benefit, which you get from a fixed annuity investment, is a low risk of losing your money. No one would get into a business if you knew that you are bound to make losses. However, there are people who usually get into these high risk ventures because success would mean equally high amount of profits. However, what would high losses imply? For a person who is putting all his income into such a scheme would be left with less money than his initial amount. This is why investing in fixed annuities is often considered good thing. You may be guaranteed of getting your invested cash back and may have the privilege of making some minimum amount of money without sweating for it. This happens despite the stock market’s volatility.

Thirdly, the range of capital that can be invested in these schemes is very wide. It accommodates both the people with only a little amount of money as well as those with some high amounts. This is unlike most other ventures that will require some minimum amounts and place an upper limit. Moreover, irrespective of the money that you invest in fixed annuity, in most cases you are guaranteed of receiving periodic payments for all your days after retirement. Moreover, in the event whereby you pass on before receiving all your dues, there will be the person whom you name as your next of kin. He or she will receive all the remaining payments.

However, there will also be disadvantages that you should look out for before getting into this annuity investment. To begin with, the fixed interest rates could change after some time. Therefore, when they decrease it will be a disadvantage for you since that was not in your plans. Moreover, it would be impossible to withdraw the invested money since you would attract high levels of surrender charges.

The second disadvantage is the fact that fixed lifetime payments could decrease in their value. This will happen due to increase in cost of living and inflation rates. Therefore, the payments that were enough at time X might not be enough for the same bills at time X+Y where Y is a positive number of years. This means that you should contact your financial advisor before making this investment.

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