Tax Debt Help – Building Retirement Income With Annuities
Building retirement income with annuities
Annuities may help you provide additional retirement income by allowing you to accumulate tax-deferred savings and then receive periodic payouts for a specified period of time, beginning now or at a later date. Annuities are commonly used to supplement your monthly retirement income already received from your IRA and 401(k) plans.
Common annuity characteristics include:
- Interest earned is not taxed until payouts begin.
- Contributions to an annuity are not deductible at the time of contribution unless used as part of a qualified plan, such as a 401(k) or IRA.
- The death benefit (in the form of the remaining cash value) can be passed on to the owner’s beneficiary(ies).
There are several types of annuities available. When shopping for annuities, consider your risk tolerance. Do you want a fixed guaranteed return (fixed annuity)? Or do you prefer the potential for increased earnings with some investment risk (variable annuity)?
Fixed Annuities
- Rate of return is guaranteed by the insurance provider only, not by the government.
- Tax-deferred growth allows you to defer paying taxes on your earnings until you begin withdrawals.
- Fixed and guaranteed income for a specified period of time.1
- Unlimited contribution limits unless held in a qualified plan, such as a 401(k) or IRA.
Variable Annuities
- Invest in a diversified portfolio where returns fluctuate based on your portfolio’s performance.2
- Offer the potential for a greater return with investment risk.
- Tax-deferred growth allows you to defer paying taxes on your earnings until you begin withdrawals.3
- Guaranteed death benefit secures your original investment to your heirs.
- Unlimited contribution limits unless held in a qualified plan.
- Fixed account option allows your assets to grow at a fixed rate of return.
- Tax-free fund transfers between sub accounts within your annuity.
Equity-Indexed Annuities
- Guaranteed rate and fixed payments similar to fixed annuities.
- Asset grow directly related to index performance (e.g., S&P 500, Dow Jones Industrial Index).
- Assets increase when related index increases; if index decreases, minimum rate is guaranteed by annuity provider.
It’s always best to discuss with a financial advisor how an annuity might help you build additional income for retirement.
S. Raines, Sr. Financial Advisor/Tax Preparer
1Subject to the claims paying ability of the insurer.
2Variable annuities are long-term investment vehicles designed for retirement purposes. Values and investment returns will fluctuate, and you may have a gain or loss when money is withdrawn. There may be a 10% IRS penalty for withdrawals made before age 59½. Some annuities have a forced annuity age. For more complete information on variable annuities, including charges and expenses, obtain a prospectus. Read it carefully before you invest or send money.
3There may be a 10% IRS penalty for withdrawals made before age 59½.
Tax Debt Help – Investing in Bonds
A bond is an interest-bearing or discounted government or corporate security that calls for the issuer to pay you, the bondholder, a specified sum of money, usually at specific intervals, and to repay the principal amount of the security at maturity.
As a bondholder, you essentially have an IOU from the issuer but no corporate ownership privileges, as stockholders do. For more information, select a topic from the drop-down list or scroll down the page.
Issued by states, cities, counties, school districts, housing authorities, hospitals and other municipal agencies, municipal bonds are used to fund local governments and the building of roads, bridges, sewer systems, schools, and other projects.
Types of Bonds
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There are primarily two types of municipal bonds: general obligation bonds and revenue bonds. General obligation bonds are backed by the taxing authority of the issuer, while revenue bonds are backed only by the funds generated from a specific project (e.g., tolls from a bridge or revenues from a water system).
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Bond Ratings
Municipal securities are rated based on their creditworthiness. General obligation bonds are usually considered safer (all other factors being equal) because their financial backing is derived from the taxing authority of the municipality and is not dependent on any one particular project. Some municipal bonds are also insured by independent insurance companies. -
Bonds and Taxes
Municipal securities provide a fixed interest payment semiannually and generally are not subject to federal taxation.*
Interest payments received by bondholders, owning bonds issued within their state of residency, are typically exempt from state and local taxes, but not in all states. To compare the yield on a tax-free municipal bond with a comparable taxable bond, use our taxable equivalent yield calculator.Some municipal bonds may be subject to the federal alternative minimum tax. The gain (loss) incurred from purchasing municipal bonds at a discount (or at a premium) may be subject to capital gains (losses) tax assessments.
S. Raines, Sr. Financial Advisor/Tax Preparer
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