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What Type of Annuity Is Right for You?

what types of annuity are there for you

So, you have decided that an annuity makes sense for your retirement. But what type of annuity might be right for you? This will depend on the answers to a variety of questions.

What is your risk tolerance? What timeline do you have for your money? What annuity guarantees are important to you? What you hope to accomplish with the annuity contract? All of these considerations and more are relevant to what annuity might be a good fit for you.

Here are some questions to consider as you think about what annuity might be right for your situation.

1. What Are You Looking For?

If you are looking for ways to earn interest predictably each year -- or earn a certain minimum interest rate -- you should consider a fixed-type annuity. A traditional fixed annuity or a multi-year guarantee annuity can pay you a preset interest rate.

What if you want more interest than a guaranteed minimum, but want protection for your principal? Then you might look at fixed indexed annuities, which can let you earn interest above the guaranteed minimum of fixed-type annuities.

Your growth potential is tied to an underlying financial benchmark, but these interest earnings aren't guaranteed. Also, the insurance company has some limits on your money's growth potential.

Why? This is in exchange for the protection of your principal and earned-interest money against losses when the index benchmark goes down.

If you are looking for maximum growth potential and aren’t too worried about market risk, a variable annuity might make sense for you. The value of your money can fluctuate depending on how the mutual fund subaccounts in which you have your money perform.

But this type of annuity offers the most growth potential.

2. What Is Your Purpose for the Annuity?

Just like with other types of assets, annuities are built for all sorts of purposes.

Every type of annuity can pay you a guaranteed income, but not all of them are equal in this benefit. Some annuities are built more for growth and tax-advantaged accumulation. Fixed annuities and multi-year guarantee annuities tend to fit this bill.

Deferred income annuities, immediate annuities, indexed annuities, and variable annuities all tend to have product designs that are more favorable toward maximizing your guaranteed income.

Deferred income annuities and immediate annuities are intended solely for guaranteed income payments. You can use them for income now or income later.

A fixed index annuity may have a rider benefit attached to it that gives you more flexibility than these options. The rider benefit allows you to receive guaranteed income for life, but still have some access to your money.

However, these riders usually come with an annual fee that is charged each year. You will also find many variable annuities in the market with this benefit.

Of course, many variable annuities and fixed indexed annuities are built more for growth than for income, too. Your financial professional can walk you through these options. Regardless, your annuity contract needs to clearly fit the purpose you are seeking to fill.

3. What is Your Financial Timeline?

Do you need to start your guaranteed income stream now or in the next 12 months? Or will you need the annuity income some years down the road?

If your income need is in the short term, look at an immediate annuity for your retirement. Depending on what money you put into your immediate annuity, part of your income payments may be tax-free.

If your income is some years from now, check out deferred annuities, or annuities with a "deferral period" of growth before you start collecting income from them.

Fixed annuities, MYGAs, indexed annuities, and variable annuities are all examples of contracts with deferral periods. Your financial professional can walk you through the annuity options that fit what you need.

4. How Much Liquidity Do You Need?

Annuities, by nature, aren't designed to be that liquid of instruments. This is perhaps their greatest disadvantage.

But most modern annuity contracts that are commercially available today for consumers give you some liquidity. They will allow the contract owner to withdraw a certain percentage of the contract value, each year, without penalty. Insurance companies call this a "free withdrawal."

For example, most insurance companies allow withdrawals of up to 10% of the contract value each year without penalty. What if you don't pull out money from the annuity for some years?

In today's marketplace, some annuities go beyond a 10% free withdrawal per year, if that is the case. Some contracts have "cumulative free withdrawal provisions," or where they let you take as much as 30% of your money's value, if you hold off on withdrawals for a few years.

Other contracts can also give you this benefit, called an additional liquidity rider, if you are willing to pay a fee. In one contract sample, an additional liquidity rider costs 0.95% of the contract value each year. But in exchange, you can withdraw up to 20% of the contract value each year without penalty.

If you hold off on withdrawing money for a certain period, this benefit accrues. It can eventually let you withdraw up to 40% of the contract value without penalty.

Just keep in mind that any withdrawals that are in excess of the free withdrawal amount can result in stiff penalties. Generally speaking, annuity contracts have a back-end surrender charge schedule that applies, making an annuity a long-term commitment.

If you were to take out money in excess of the free withdrawal amount in the first year, you might be looking at a surrender charge of a sort. Your financial professional can walk you through this downside, and others as well as the positives, of any annuity you are considering.

5. What Kind of Tax Treatment Do You Want?

Distributions that are taken from annuities that are housed inside IRAs or qualified plans will normally be fully taxable as ordinary income. In other words, they will be taxed at the recipient's top marginal tax bracket rate.

However, non-qualified annuities will generally treat a portion of each payment that is made to the annuitant as a tax-free return of principal. Once the principal has been exhausted, then all future payments will be fully taxable as ordinary income.

But annuities are the only type of tax-deferred vehicle that have no contribution limits like IRAs and qualified plans do. For example, you technically could even put $3 million in an annuity at once.

Then the entire balance will start to grow tax-deferred just like an IRA or qualified plan. However, most insurance companies have some protocol for what they approve of how much you put into a contract. Your financial professional can discuss that with you.

Of course, you don't get to deduct any contributions you make to a non-qualified contract. Also, all of the growth in the contract will be taxed as ordinary income.

Furthermore, annuities have the same 10% early withdrawal penalty that IRAs and qualified plans do. Any withdrawals that are taken out before the annuitant reaches age 59.5 will be subject to that tax penalty on top of the actual tax bill.

Find the Right Type of Annuity for Your Retirement Goals

The type of annuity that is right for you will depend upon a number of factors. All of these must be considered before choosing a specific annuity product. Consult your financial professional for more information on annuities and how they can benefit you.

What if you are looking for a financial professional to help you with your retirement? Or perhaps you want another opinion of the current plan you already have on the books.

No sweat, help is just a click away at SafeMoney.com. Use our "Find a Financial Professional" section to connect with a financial professional directly. Should you need a personal referral, call us at 877.476.9723.

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