Annuities and Retirement Planning of Abney Associates Ameriprise Financial Advisor

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Abney Associates Ameriprise Financial Advisor

• Annuities and retirement planning

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• Annuities come in many different forms. There are
  immediate and deferred annuities, with both fixed
  and variable rates. However, whatever the type of
  annuity, all can be classified as either
  qualified or nonqualified annuities. And the
  distinction is easy.
• Qualified annuities are used in connection with
  tax-advantaged retirement plans, such as defined
  benefit pension plans, Section 403(b) retirement
  plans (TSAs), or IRAs. Premiums for qualified
  annuities are generally paid with pretax dollars,
  as are any investments purchased for use in a
  qualified retirement plan.

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• By definition, any annuity not used to fund a
  tax-advantaged retirement plan or IRA is
  considered a nonqualified annuity. Contributions
  to nonqualified annuities are made with after-tax
  dollars--premiums are not deductible from gross
  income for income tax purposes.
• In essence, then, the products are the same. It
  is the placement in or out of a retirement plan
  (and the resulting tax treatment) that
  distinguishes one from the other.

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QUALIFIED ANNUITIES

• As noted, contributions to a qualified annuity
  are deductible to the individual or employer
  (and/or excludable from the income of the
  individual) at the time of contribution, as would
  be any tax-advantaged retirement plan investment.
  When an annuity is in a retirement plan, the
  rules of the plan govern all tax matters.
  Specifically, the special tax-deferral advantages
  of annuities, and the unique tax penalties and
  tax treatment of annuities at distribution, are
  superseded when used in a retirement plan by the
  tax rules governing all investments in such
  plans. It is for this reason that many financial
  advisors question the use of deferred annuities
  in retirement plans.
• Note Although it is true that the tax-deferral
  advantage of annuities is redundant in a
  qualified plan, annuity products may offer other
  features, such as a guaranteed death benefit,
  that may make them a viable investment option for
  a portion of a qualified plan portfolio.

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NONQUALIFIED ANNUITIES

• The rules for nonqualified annuities are
  different in many respects, because these
  products are purchased with after-tax money.
• If the nonqualified annuity is partially or
  fully surrendered, the first dollars out are
  considered earnings, and all of the earnings are
  taxed at ordinary income rates. After all of the
  earnings have been distributed, the remaining
  portion that represents the original investment
  in the annuity is received tax free.
• If payments are taken in the form of an annuity
  payout (i.e., a distribution taken out over a
  predetermined period of time), a portion of each
  payment is considered a return of the original
  investment and is excludable from gross income,
  and a portion is considered earnings and taxed at
  ordinary income tax rates.

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• The percentages that are earnings and return of
  investment are based on the type of payout at the
  age of the recipient. Note, too, that
  distributions taken before age 59½ are subject to
  a 10 percent early withdrawal penalty tax on
  earnings.
• Note Variable annuities are long-term
  investments suitable for retirement funding and
  are subject to market fluctuations and investment
  risk, including the possibility of loss of
  principal. Variable annuities are sold by
  prospectus, which contains information about the
  variable annuity, including a description of
  applicable fees and charges. These include, but
  are not limited to, mortality and expense risk
  charges, administrative fees, and charges for
  optional benefits and riders. The prospectus can
  be obtained from the insurance company offering
  the variable annuity or from your financial
  professional. Read it carefully before you invest.