With a fixed annuity the insurance contract guarantees the buyer a fixed rate of return on their contributions for a specified period. Fixed annuities are offered for periods of 5, 6, 7, 8, 9 and 10 years. They offer a guaranteed interest rate for year one, and often include a year one added “bonus rate.” In years 2+, the rate can change to be higher or lower than year one but will never go below the minimum prescribed interest rate set in the contract. When fixed annuities come within 30 days of maturing, you are given the option to let them renew, at the then current interest rate offered by the insurance company. Or you may withdraw your money.
A withdrawal can happen two ways. You can close the account and receive the money, which becomes a taxable event. Or you can transfer the account to a like account and delay taxation. If the money is “qualified,” meaning in a retirement account such as an IRA, then you simply transfer the IRA to another IRA. If the money is “non-qualified,” such as an individual or joint tenant account, then you simply do a direct transfer to another annuity. This is called a “1035 exchange.”
A feature of non-qualified fixed annuities (individual, joint tenant, trust accounts, etc…) is that they grow tax-deferred like IRAs. And you do not have the contribution limits that come with IRAs.
Fixed annuities have a penalty for making early withdrawals. This is called a surrender charge. Most fixed annuities come with one “free withdrawal” per year included, of a pre-specified amount. You only pay a surrender charge on the amount that exceeds the free withdrawal, which may also be subject to an additional fee called a Market Value Adjustment (MVA). Most fixed annuities waive all surrender charges in the event of terminal illness of the owner, or if the owner needs to go into a nursing home. You never forfeit interest earned in a fixed annuity just because you make an early withdrawal.
Fixed annuities can also be annuitized, depending on the age of the owner, and turned into a lifetime income stream.
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Disclosure: The content on this web page is not intended to be a recommendation to purchase an annuity. A 10% IRS penalty may apply to withdrawals prior to age 59 1/2. Surrender charges may apply to withdrawals during the surrender period. The information in this material is not intended as tax or legal advice. Individuals should consult with their tax or legal professionals for specific information regarding their situations. All annuity guarantees are subject to the claims paying ability and principal strength of the annuity issuer.