Fixed index annuities are linked to the performance of a stock market index such as the S & P 500 and provide a guaranteed interest rate and the potential for growth based on the performance of the underlying index. If the stock market does well, you will earn a higher return. If the stock market does poorly, you will earn a lower return, but never less than the guaranteed minimum interest rate set in the contract. The index offerings have caps, meaning you will not earn the whole of the stock market’s performance in a good year. You will earn up to a capped amount, even if the stock market performance exceeds the cap.
When fixed indexed 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 indexed 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 indexed annuities have a penalty for making early withdrawals. This is called a surrender charge. Most fixed indexed 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 indexed 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 indexed annuity just because you make an early withdrawal.
Fixed indexed 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.
Disclosure: The S & P 500 is an unmanaged group of securities considered to be representative of the stock market in general.