Are you retired or near retirement? Do you have more money than you need, want, or know what to do with at this point in time? Are you tired of paying unnecessary taxes?
I ask these questions because more and more I am running into people who fit this profile. It’s not that they are Bill-Gates rich, but they’ve lived right, saved a few dollars, and are able to meet current bills with current income. Still, they have some money that not only is providing low returns but, to add insult to injury, even these low returns are being eroded by federal and state income taxes.
If you recognize yourself or someone you know and care about in the above description, there is help. It may be beneficial for you to consider a deferred fixed annuity with a highly rated insurance company. If structured properly, such a solution can provide competitive rates when compared to fixed bank products.
I know I’ve used the A word, annuity. Fixed annuities are complex flexible tools. Like any tool, they can be used correctly or incorrectly.
The type of annuity I am discussing is a deferred fixed annuity. As a CD, it offers a fixed interest rate for a given period of time. Unlike a CD, there is no FDIC insurance. It is guaranteed by the claims-paying ability of an insurance company, not a bank. There is, however, a state guarantee fund for insurance companies.
Interest on bank CDs is taxable at your highest rate. This means that a person in the very common combined state and federal tax bracket of 30 percent, ends up with only a 2.1 percent return on a 3 percent CD.
Interest in a deferred fixed annuity accumulates tax-deferred. It will be taxed when it is withdrawn, but that may be years in the future. In the meantime, you are able to compound the entire interest rate. In the above example, 3 percent would be 3 percent.
Fixed annuities are designed for retirement. One reason the IRS allows for tax deferral is that the government wants to encourage us to save for our future. As a result, the IRS imposes a 10 percent penalty on any earnings withdrawn before a contract owner reaches the age of 59 and a half. This is not an issue for anyone over this age.
Deferred fixed annuities contain a few other flexible features that make them attractive to many people. If held until death, like a IRA or life insurance, they transfer outside of probate. .
I do not know if a deferred fixed annuity would meet your needs. I do know that it’s a good fit for many. You just might be among them.