An annuity is simply a contract between you and an insurance company. You pay the insurance company one or more purchase payments (“premium”). In exchange, you get the benefits the insurance company guarantees through your annuity contract.
Annuities can help address some common financial concerns, from helping you save for retirement and providing a level of protection for your retirement savings to helping address inflation and longevity.
Annuities are designed to complement other financial products as part of your overall retirement strategy. They offer important features and benefits that can help you accumulate for retirement, supplement your retirement income, and even help diversify your portfolio. (However, remember that diversification does not ensure a profit or protect against loss.) For additional help in considering whether an annuity is right for you, use the tools and guides available from the Alliance for Lifetime Income.
If an annuity is a good fit for you, the purchase amount will depend on your financial needs and goals. Annuities are a long-term contract, so it’s important to be sure you won’t need the money for other financial commitments or unexpected expenses. Your financial professional can help you determine whether an annuity makes sense as part of your overall retirement strategy, and in what amount.
Some common retirement-account tax rules apply to annuities – but not all of them. Let’s begin with tax deferral: Because the money you place in an annuity grows income-tax-deferred, you don’t have to pay income taxes on any interest or gains until you take money out of your contract. Any distributions from your annuity will be taxed as ordinary income. But – as with IRAs, 401(k)s, and pension plans – if you take money out of your annuity before age 59½ you’ll have to pay an extra 10% federal additional tax on top of any ordinary income tax. Please consult your tax advisor for guidance about your unique situation.
Nonqualified annuities (those held outside a retirement account) are not subject to RMDs beginning at RMD age. That’s because nonqualified annuities are purchased with money on which you have already paid income taxes. However, if you purchase an annuity within an Individual Retirement Account (IRA), you’ll have to take RMDs beginning at RMD age. You should also be aware that some annuity contracts require you to start distributions at a certain age (generally between 85 and 100) – so it’s important to ensure that the contract meets your long-term goals. A tax advisor can help you understand the tax implications of buying an annuity.
There are different kinds of annuities. Some give you immediate access, while others have a waiting period. Contracts that require waiting a specific period of time before you take money out are called deferred annuities. Typical deferral periods can range from three to 10 years. After the deferral period, you can annuitize the contract (this means you start receiving money through scheduled lifetime payments, or “annuitization”). Some annuities also let you take free withdrawals during the deferral period, up to specified amounts. But it’s important to understand your contract – because if you take out more money than it allows before the deferral period ends, you will likely incur a surrender or withdrawal charge and market value adjustment (MVA).
A market value adjustment (MVA) is a calculation we use to adjust your annuity’s withdrawal amount. An MVA may adjust the withdrawal amount up or down, depending on the interest rate conditions when you take distribution(s) compared to those conditions when you contributed your premiums. But while the MVA can affect your withdrawal amounts, it can never cause your contract’s cash surrender value to be less than the guaranteed minimum value or greater than the accumulation value.
There are a lot of questions about annuities, their purpose, and their cost. The fact is, annuities aren’t right for everyone. It’s also true that some annuities charge fees in exchange for the benefits they offer. But for people who want the opportunity to accumulate for retirement, a level of protection from market volatility, and guaranteed lifetime income, annuities can be a valuable addition to their overall financial portfolio.
Annuities help protect some of your retirement assets in the same way you protect your car, your home, and your health. In each of these cases, you’re transferring away some of the risk of financial loss to an insurance company. A fixed index annuity (FIA) offers the potential to build some of your money with principal protection from market downturns. A registered index-linked annuities (RILA) offer the opportunity for a level of protection through a variety of crediting methods (which may also be called index strategies). Both FIAs and RILAs provide income payments during retirement – and tax deferral and a death benefit during the accumulation phase.
Allianz offers two types of annuities to help address your unique financial needs and retirement goals: fixed index annuities (FIAs) and registered index-linked annuities (RILAs). Annuities are complex products, and it’s important to understand the balance between their features and factors. A financial professional can help you decide whether an annuity is appropriate for your needs.
1 Income for life is subject to following the terms of your contract.
2 With the purchase of any additional-cost riders, the contract’s value will be reduced by the cost of the rider. This may result in a loss of principal and interest or credits in any year in which the contract does not earn interest or credits in an amount less than the rider charge.
As with any investment vehicle, RILAs are subject to risk – including possible loss of principal. Investment returns and principal will fluctuate with market conditions so that contract values, upon distribution, may be worth more or less than the original cost.
Withdrawals will reduce the contract value and the value of any potential protection benefits. Withdrawals taken within the contract withdrawal charge schedule will be subject to a withdrawal charge. All withdrawals are subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10% federal additional tax.
Purchasing an annuity within a retirement plan that provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. An annuity should be used to fund a qualified plan based upon the annuity’s features other than tax deferral. All annuity features, risks, limitations, and costs should be considered prior to purchasing an annuity within a tax-qualified retirement plan.
Guarantees are backed by the financial strength and claims-paying ability of the issuing company. Variable annuity guarantees do not apply to the performance of the variable subaccounts, which will fluctuate with market conditions.
• Not FDIC insured • May lose value • No bank or credit union guarantee • Not a deposit • Not insured by any federal government agency or NCUA/NCUSIF
Products are issued by Allianz Life Insurance Company of North America. Registered index-linked annuities are distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297.
This notice does not apply in the state of New York.
Product and feature availability may vary by state and broker/dealer.
