Tax-Deferred Indexed Annuities:

Suppose you are tired of low-interest rates at the banks and scared of a volatile stock market and have a block of money that you are willing to tie the bulk of up for a specific time. In that case, a tax-deferred indexed annuity may be worth considering. The indexed annuity can be used in an already tax-deferred or tax-free Roth IRA. Currently, taxable money can also be put into a tax-deferred indexed annuity. Tax deferral allows one to earn interest on money that would have gone to Uncle Sam. Eventually, he will get his fair share.

Many Tax-Deferred Indexed Annuities:

1. Pay an immediate bonus of up to 8% on all net premiums paid during the first 5-7 years.
   2. Lock in gains annually that can never go down due to stock market decline.
   3. Re-sets annually, thereby allowing you the potential for growth from a previously locked-in high amount while those in the market are still attempting to recover losses.
   4. Allow for 10% annual withdrawals before maturity without a surrender charge or market value adjustment for interest. Some allow for 20% withdrawals if you are in a nursing home or did not make a withdrawal the previous year.
   5. Provide an optional 5 ½ – 6 ½ % annual compound growth rider for future income on all net premiums and bonuses regardless of the performance of the index allocations.
   6. Give you a better than average chance to get a better than average return without stock market risk. This is a conservative diversification tool.
   7. No surrender charges or market value adjustments at death. Lump-sum is available.
   8. Some allow you to surrender after two years for a return of your premium.

Example:

The client had money allocated in an indexed account in March 2008. The index dropped 40% by March 2009. The client remained at his previous high & did not go down that year. In March 2010, the client got a 43.11% gain on his previous high mark & does not ever have to worry about it going down if the stock market falls. Thus, he had a nice gain while those in the stock market were recovering losses.

Indexed annuities are priced to earn 1-2% above fixed-rate annuities over time. Therefore, you should not expect returns, as shown in the example above. But it can and did happen.

Tax-Deferred Indexed Annuity Trade-Offs Include:

1. You don’t get 100% of the indexed growth. In the example listed above, the actual indexed growth was 58.11%, whereas my client only got 43.11%. However, my client’s money is locked in and can’t go down if the stock market goes down.
   2. The bulk of the money is locked up for 10-14 years. Thus, don’t consider putting any money into an indexed annuity if you will need over 10% per year from it prior to maturity.
   3. Whether an annuity is used for an IRA or not, the IRS will charge a 10% penalty of early withdrawals prior to age 59 ½ with the exception of death and some income options. Thus, never put money into a tax-deferred annuity if you will need any of it prior to age 59 ½.
   4. Declining surrender charges range from 18-10%. You may be able to eliminate surrender charges in the third year for a nominal annual fee.  However, even if you have a mutual fund with no surrender charges and need the money when the market is down 40%, it still costs you 40% regardless of what you call it.
   5. Most regulatory agencies don’t allow us to put over 50% of a client’s net worth into a tax-deferred indexed or fixed annuity. However, since life’s emergencies and opportunities sometimes come around, I prefer that my clients limit the premium to 30-50% of liquid assets rather than net worth.
   6. Taxed deferred annuities are not FDIC insured. They are guaranteed by the full faith and credit of the insurance company. Annuities bought in Mississippi-by-Mississippi residents also have the added protection of up to $250,000 of insurance provided by the Mississippi Guaranty Association.

Sheryl Moore is the Indexed Annuity industry’s most recognized expert.  The link below is a rebuttal letter she wrote to the Wall Street Journal regarding indexed annuities. Even though it is somewhat generic, it will give you a good idea of how the indexed annuities work & how they may benefit you. I had the opportunity to meet Sheryl at one of Midland National’s Agents Advisory Group meetings. Sheryl permitted me to use this letter and her website link listed earlier in the annuity section.

101510 Annuity Specs Setting It Straight with the Wall Street Journal

Fixed Annuities

A fixed annuity works similarly to a bank CD in that it offers a guaranteed rate for a specific time. Many fixed annuities will only allow you to withdraw the interest prior to the maturity, typically 4-10 years. Thus, don’t put money in a fixed annuity if you think you may need more than the interest during the time selected. The longer you tie the principal up, the higher rate of return you will receive. Fixed annuities are tax-deferred. The fixed annuity is not FDIC insured like the indexed annuity discussed above. It also is guaranteed by the full faith and credit of the insurance company and is insured up to $250,000 by the Mississippi Guaranty Association for Mississippi residents that purchased the fixed annuity in Mississippi.