In this article
- Potential for accumulation, tax-deferred
- Is fixed or variable more suitable for you?
- Costs vs. benefits
- Diversifying can help manage risk
Annuities are one of the most popular investment products available today. One reason annuities are attractive is that they can accumulate value over time.
By providing potential growth that is tax deferred, an annuity's investment earnings can accumulate and compound untouched by federal, state, or local income taxes until you begin making withdrawals, which is usually after retirement. Keep in mind that withdrawals made before age 59½ are taxed as ordinary income and may be subject to a 10% federal penalty. There are different types of annuities and they can be classified in a number of ways. For example, fixed annuities guarantee* a certain rate of return for some specified period of time.
Variable annuities offer a choice of underlying investment options. These may include fixed accounts, which can help protect principal from market risk, and variable investment accounts in stock and bond portfolios. The value of a variable annuity is not guaranteed and will vary according to the performance of the investments in the underlying investment options.
Together, tax deferral and investment options make annuities attractive to people who are investing to supplement future retirement benefits and to retirees who want greater control over their income and the flexibility to continue deferring taxes on investment earnings.
* Guarantees are backed by the claims-paying ability of the issuing company.
What are annuities?
Annuities are essentially contracts in which payments are made to an issuing insurance company which agrees to pay out an income or a lump sum amount at a later date. Until the 1970s, most annuities were sold through insurance companies and offered only a fixed amount to be paid out. Annuities today are sold through banks and insurance companies and are much more flexible. They may include both fixed accounts and potentially higher-returning variable investment options.
Money is accumulated in an annuity through contributions and investment earnings.
You should fully investigate the insurance company's stability and financial strength through an independent agency, such as Moody's, or Standard & Poor's, before committing to a contract.
Deferring current taxes may help build value
The power of tax-deferred growth can be substantial compared with a comparable taxable investment. Compared with other tax-deferred accounts, such as IRAs or 401(k)s, you have much greater control over the income generated from your annuity. The same 10% federal tax penalty that applies to early withdrawals from retirement accounts also applies to annuity withdrawals made before age 59½. Early withdrawals are also taxed as ordinary income. In some instances you may be able to defer making withdrawals until several years past retirement. (Check your policy for details.)
Annuities: a range of benefits
- You can make a single contribution or a series of payments over time.
- You generally can contribute any amount, regardless of your income level or sources of income. Check your policy for details.
- When you begin making withdrawals, you can choose from different payout methods, depending on your contract provisions, including a fixed amount for life for you and/or your spouse, or payments to your beneficiaries or heirs.
- Payout methods may include insurance features, which guarantee payment of an amount defined in your contract to your designated beneficiaries if you die before withdrawals begin. In most cases this payment does not have to pass through probate.
- They generally allow unlimited after-tax contributions, whether you have earned income or not, and your contributions can continue even after retirement.
- At withdrawal, only the investment earnings on your annuity contributions are taxable.
Help maximize the value of your annuity
Fees charged for annuities are similar to those on other investments, but with additional expenses of insuring the total value of premiums paid. In choosing an annuity, you may want to compare both annual expenses and insurance charges as well as sales charges. Many annuities collect a surrender charge if the contract is canceled prematurely. But if you plan to use your annuity as a long-term investment, you'll likely be more concerned with front-end sales loads and annual contract charges than surrender fees.
Choose an annuity that offers a variety of investment options
Many experts suggest that individuals in their 30s or 40s concentrate their long-term investments in stocks, which provide the greatest potential for long-term capital appreciation over time. Of course, these investments also carry higher risk. You might also want to diversify your investments to help reduce investment risk. As your lifestyle changes or your financial needs change, you will want the flexibility to rearrange your investments to keep in step with your situation. Look for annuities with no-fee exchanges and a variety of investment options.
Dollar cost averaging could boost long-term return potential
That is, by investing the same amount at regular intervals, you essentially buy more when prices are low and less when prices are high. This may help manage some of the normal fluctuations of the stock markets over the years. Dollar cost averaging does not assure a profit or protect against a loss in declining markets. Because such a strategy involves periodic investments, you should consider your financial ability and willingness to continue purchases through periods of low price levels.
Increase the potential return on aggressive investments
Even though the maximum federal capital gains tax rate is well below the top income tax rates, you may still benefit by deferring current taxes on your long-term capital gains until you make withdrawals.
Enjoy the benefits of asset allocation
Spreading your money among different types of investments has been a strategy used to potentially lower your investment risk. Annuities offer opportunities to diversify among fixed account and variable investments, thereby helping you manage your risk while still allowing you to potentially benefit from higher returns.
Use annuities to pass money along to heirs quickly
Annuities can offer a number of advantages in estate planning. For example, if you designate family members as beneficiaries to the annuity, your loved ones will (in most cases) receive the insurance benefit directly, without having to wait for your estate to be settled. If your spouse is named beneficiary, he or she may even be able to keep the annuity in place and continue tax deferral on any investment earnings if you die prior to annuitization.
Choose fixed or variable investment options
With little risk to principal, fixed annuities offer a stated rate of return for a specified period of time. Variable annuities include a variety of investments that may offer higher potential for return with a higher risk to principal due to market fluctuation.
Variable investment choices can include:
- Equity fund account -- common stocks
- Fixed-income fund account -- bonds, preferred stocks
- Balanced fund account -- stocks and bonds
- Money market fund* account -- bonds and notes
- Fixed-rate account -- no risk to principal; bonds and notes
*Not FDIC Insured
Building your nest egg: cost vs. benefits
An annuity can be an excellent investment vehicle if you are able to forego use of the money for several years. Annuities also offer unlimited contributions, and seek the protection of principal on fixed accounts and the potential to earn higher rates of return on your investments in variable accounts. Annuities may also entail higher fees and expenses than some other investment vehicles, in part due to the insurance feature annuities provide.
Annuities today are flexible investment vehicles that can be used to help meet a variety of financial needs. If you have been investing in other types of investments, a variable annuity might be the next logical step for a portion of your personal retirement savings plan. Whatever your financial plans for the future, an annuity can help you build a nest egg that will be ready when you are.
Your financial professional can provide more information and help you determine if there's an annuity that's appropriate for your portfolio.
Important Note: AXA believes that education is a key step toward addressing your financial goals, and this discussion serves simply as an informational and educational resource. It does not constitute investment advice, nor does it make a direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option. Your unique needs, goals and circumstances require the individualized attention of your financial professional. Asset allocation and rebalancing do not guarantee a profit or protection against investment loss.
Life insurance and annuities are issued by an affiliate, AXA Equitable Life Insurance Company (NY, NY) and by various unaffiliated carriers. Securities products and services are offered through AXA Advisors, LLC (member FINRA /SIPC), 1290 Avenue of the Americas, NY, NY 10104 (212-314-4600). Securities (including mutual funds) are not FDIC insured, not bank guaranteed and subject to investment risk, including possible loss of principal invested. AXA Advisors and AXA Equitable are affiliated and do not provide tax or legal advice.
Amount in equity investments are subject to fluctuation in value and market risk, including loss of principal.
International securities carry additional risk including currency exchange fluctuation and different government regulations, economic conditions or accounting standards.
Stocks of small-size companies may have less liquidity than those of larger companies and may be subject to greater price volatility than the over all stock market. Smaller company stock involve a greater risk than is customarily associated with more established companies.
Bond investments are subject to interest rate risk so that when interest rates rise, the prices of bonds can decrease and the investor can lose principal value.
An investment in a money market fund is not insured or guarantee by the Federal Deposit Insurance Corporation or any other government agency.
Please consider the charges, risk, expenses and investment objectives carefully before purchasing a mutual fund. For a prospectus containing this and other information, please contact a financial professional. Read it carefully before you invest or send money.
Information provided has been prepared from S&P Capital IQ Financial Communications sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is provided for informational purposes only, and is not intended for solicitation or trading purposes. S&P Capital IQ Financial Communications is not an affiliate of AXA Equitable. Please consult your tax and legal advisors regarding your individual situation. Neither AXA Equitable nor any of the data provided by AXA Equitable or its content providers, such as S&P Capital IQ Financial Communications, shall be liable for any errors or delays in the content, or for the actions taken in reliance therein. By accessing the AXA Equitable website, a user agrees to abide by the terms and conditions of the site including not redistributing the information found therein.
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GE 111145 (02/2016)