INCOME PLANNING FOR YOUR LIFETIME. THE FACTS ON ANNUITIES

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1 { INCOME PLANNING FOR YOUR LIFETIME. } THE FACTS ON ANNUITIES

2 ANNUITIES: INCOME PLANNING FOR YOUR LIFETIME Whether you are dreaming of golfing in Arizona or traveling around the world, a financially comfortable and secure retirement may be yours if you start to plan for it now. The average American spends a quarter of their life in retirement, but many people may be disappointed unless they begin saving for their retirement today. An annuity is one type of investment that can help you save for retirement because your earnings grow tax-deferred and, if made outside of a qualified retirement plan, there are no limits to your annual contributions. 2

3 WHAT IS AN ANNUITY? An annuity is a contract sold by a life insurance company. In return for an investment (in one payment or in several), an annuity guarantees a series of fixed or variable payments for life or a specified period of time. All guarantees are subject to the claims paying ability of the issuing insurance company and do not apply to the investment options of a variable annuity. Annuities have become an attractive retirement vehicle because any earnings grow tax deferred whether they re from interest income, dividends or capital gains. This means that an investment in an annuity has the opportunity to grow faster than a similar taxable investment because money that otherwise would have been paid in taxes each year remains in the account to earn more. Annuities are categorized depending on the following factors: How premiums are paid (single payment or multiple payments) When benefits begin (immediately or deferred) How the contract value is accumulated (fixed or variable) How the benefits are paid out (fixed or variable) 3

4 INVESTING IN AN ANNUITY: THE BENEFITS Tax-Sheltered Investment Unlike many other investments, annuities have a tax-shelter advantage that makes them very attractive to many investors. The money an annuity earns each year is not taxed as income, but continues to grow tax-deferred until the money is withdrawn. If you are an investor already, you may be seeing thousands of dollars being spent each year to pay income taxes on your investment income. However, if you invested in an annuity, those tax dollars could still be working for you, earning additional money inside the annuity. Income Once regular annuity payments begin, the insurance company will continue to make regular payments to you for a specified time period or for life. Payments are subject to the claims-paying ability of the insurance company. Avoid Taxes On Social Security Benefits For retirees who are receiving income in addition to their Social Security benefits, annuities can provide a special benefit. Up to 85% of your Social Security benefits can be taxed depending on the amount of additional income you are receiving. Certain conditions and qualifications must be met in order for favorable tax treatment on Social Security benefits to apply. Please discuss with your tax advisor as it relates to your situation. If you are a retiree with investment income you do not need for current expenses, or for any anticipated short-term need, you can convert your taxable income generating investments into an annuity where any income within the annuity is tax deferred. 4

5 TYPES OF ANNUITIES Fixed annuity A fixed annuity contract guarantees the annuitant a fixed rate of return and fixed payments, either for life or for a specified period. With a fixed deferred annuity, the insurance company credits the account during the accumulation phase with a guaranteed fixed rate of return on the investment and guarantees the return of principal. With fixed annuities, the insurer bears the investment, or market, risk. Regardless of interest rate movements, the insurance company is obligated to pay the investor the agreed upon rate. Of course, the security of principal and earnings and the fixed option payouts depend on the financial strength of the insurance company. Variable annuity A variable annuity contract is not guaranteed and the contract value and income payments will fluctuate with the performance of different subaccounts. The subaccounts invest in diverse portfolios, offering a wide choice of investments such as growth stocks, corporate bonds, or securities of foreign companies and governments. With variable annuities, the insurance company does not guarantee any minimum value for the subaccounts of the contract. The investor bears the investment risk and the possible loss of the principal amount invested. You can think of an annuity as a tax-deferred retirement savings plan. 5

6 TYPES OF ANNUITIES An immediate annuity, also called a payout annuity, is purchased with a lump sum of money. Payments generally begin immediately and continue on a monthly, semiannual, or annual basis. An immediate annuity may be appropriate for investors who want income payments right away. A deferred annuity can be purchased with a single payment or with a series of payments. Payments to the annuitant may be deferred for many years. With a deferred annuity, there is a pay-in period, which is also called the accumulation phase. During this period, any interest, dividends, and capital gains that are earned are automatically reinvested in the contract and compound on a tax-deferred basis. Deferred annuities may be appropriate for investors with other income sources who are looking for an investment vehicle that allows them to defer taxes on their retirement nest egg. Immediate or deferred annuities can either be fixed or variable. Both the value of the investor s contract and any income payments are based upon whether the account is earning a fixed or variable rate of return. 6

7 OPTIONS TO CONSIDER Continuation of payments to an heir is an option you may wish to consider when setting up your annuity. You can choose from a variety of payout plans when payments begin, including: payout over a fixed period of time payout for the rest of your life continuing payments to a beneficiary upon your death a combination of these Your payments can be taken either as: a fixed guaranteed payment a variable payment which may go up or down Free Withdrawal Provision Many deferred annuities now allow you, after the first year, to withdraw part of the cash value, perhaps 10%, without paying a surrender charge. This is the basis of the systematic withdrawal plan. Tax Restrictions Avoided Under the tax laws, you pay a penalty if you withdraw money from an annuity before you turn 59½, unless the annuity withdrawal is based on your life expectancy according to government actuarial tables. And the law also requires you to start taking at least a minimum amount of money out of your qualified plan or IRA by April 1 of the year after you turn 70½, or else suffer a 50% excise tax penalty. (continued on page 8) 7

8 OPTIONS TO CONSIDER A systematic withdrawal plan Specified amounts are withdrawn periodically from your annuity over a specified time period, allowing an investor to avoid additional taxes or charges, if properly set up. The balance of your account after each withdrawal continues to grow on the same tax-deferred basis as before, under your control. Any money left in the account at your death is payable to your beneficiary, which avoids probate. With the systematic withdrawal plan, the annuitant chooses the amount of the withdrawal, and can remove his or her funds rather quickly, should he or she desire to do so. The annuitant does run the risk, however, of outliving the value of the annuity should funds be withdrawn too quickly. Federal Tax Comparison of Investments Annuity Traditional IRA Original Not May be Investment deductible deductible Earnings Tax-deferred Tax-deferred Distributions Partially Taxable, taxable except for prior nondeductible contributions Estate Tax Included in Included in gross estate gross estate * The explanations provided in this chart are of a general nature. You should consult with your tax advisor for specific tax advice. Tax consequences may vary by state. 8

9 THE EFFECT ON YOUR TAXES Annuities have special tax advantages not shared by many other investments. While the money you pay to buy an annuity is not deductible, the earnings on the cash value are not subject to income tax until withdrawn. Annuities continue to compound earnings, giving it a significant advantage over taxable investments as a means to accumulate money over the years. Any income tax payment on your earnings is deferred until you take the money out of the annuity. Withdrawals, prior to age 59½, may be subject to a 10% federal penalty tax. Estate taxes The value of an annuity contract is generally included in a deceased owners gross estate and is subject to estate tax. 401(k) Made with pre-tax dollars Tax-deferred Taxable Included in gross estate Securities Not deductible Taxable unless in tax-exempt securities Both earnings and capital gains taxable contributions Included in gross estate 9

10 OTHER ADVANTAGES Annuities escape probate One other advantage annuities have over other types of investments they do not have to go through probate. Volumes have been written on how to avoid probate. In many states, the legal fees involved can make the probate process very expensive, even reducing the amount the heirs actually receive. In addition, the probate process is often drawn out, sometimes for years, delaying the settlement of the estate even further. But since an annuity is a life insurance contract, all of its proceeds are distributed immediately to the beneficiary under the terms of the contract, completely bypassing probate. The value of the annuity generally is included in your estate for estate tax purposes, but not for probate. This information is general in nature and should not be construed as tax or legal advice. INVEST Financial Corporation does not provide tax or legal advice. Please consult your tax and/or legal advisor for guidance on your particular situation. 10

11 Purchasing Your Annuity There are hundreds of insurance companies in the United States that offer annuities of one type or another. Each one has their own special policies, terms and pricing. Most annuities do not charge a front-end sales charge, but they can impose an asset-based sales charge or surrender charges which an investor owes if he or she withdraws money within the first several years of purchasing the annuity. Obviously, all companies and their products are not equal. Investors should carefully consider these companies before investing any money. Variable annuities are sold by prospectus. Before investing, you should carefully consider the investment objectives, risks, charges and expenses of the investment company. The prospectus contains this and other important information about the investment company. The fees and expenses a variable annuity may impose in addition to any sales or surrender charges are: Mortality and expense risk charges a charge for the insurance risk an insurance company takes under the contract Administrative fees fees for recordkeeping and other administrative expenses Underlying fund expenses fees associated to the investment options of the contract Charges for special features and riders charges for special provisions such as a stepped-up death benefit or a guaranteed minimum income benefit Prospectuses for the variable annuity and the underlying subaccounts of the annuity are available from your investment representative s office. Please read the prospectus carefully before investing. 11

12 FULL-SERVICE Busy lifestyles and multiple priorities make successful investing more challenging than ever. In today s complex and ever changing financial marketplace, it s important to take a team approach to achieving financial independence. When you join with your INVEST Representative and INVEST Financial Corporation, you create a powerful team. INVEST endeavors to make investing easy for you, give you easy access to your accounts, with a simple to understand statement and fast responses to your inquiries. With the expertise of your INVEST Representative and the convenience of a full-service investment firm at your command, reaching financial independence can become an achievable goal. We re ready to help you turn your financial goals into a reality. Simply contact the INVEST Representative who provided this brochure and take the first steps to securing your financial future today. 12 Mike Butts Program Manager Phone: (404) Clairmont Rd Decatur, GA Registered Representative of INVEST Financial Corporation, member FINRA/SIPC. INVEST and its affiliated insurance agencies offer securities, advisory services and certain insurance products and are not affiliated with Alliance Retirement & Investment Services or Emory Alliance Credit Union. Products offered are: Not NCUA insured Not Credit Union Guaranteed May lose value including loss of principal. bro