In general, annuities refer to any type of investment where periodic payments are made over a period of time. Examples of annuities include monthly homeowner loans, regular periodic deposits into a retirement savings plan, monthly annuity payments on a retirement or other type of fixed-income investment, or monthly payments on a fixed income annuity.
Annuities may be categorized based on the type of investment and the type of interest rate used. There are three main types of fixed interest annuities: interest only, variable rate and a mixture of both. Interest only annuities allow the initial interest rate to be adjusted at any given time, and the future interest rates are set by an index.
Variable-rate annuities have variable interest rates that are tied to certain currencies. Variable-rate annuities vary with changes in the global market. Variable-rate annuities are more expensive than interest only annuities may not be tax deductible. Some types of variable-rate annuities have no investment risk and are fully taxable.
Annuitants may receive payments as a lump sum. If you make your initial interest only payment early in the term of your annuity, you could potentially receive a lump sum. However, you should carefully consider this option if you are not receiving your entire interest amount on time. You could lose all of your investment in case you fail to timely make your payments.
If you are receiving regular interest rate payments on an annuity, you may want to invest some of that money in some sort of annuity products. One popular option is called a tax-deferred annuity. In this case, the money you are paying for your fixed-income annuity will be exempt from taxes until you make your initial interest payment. Once you make your initial payment and pay the taxes on that money, your tax-deferred annuity begins to lose its tax benefits. This type of annuity usually requires that you begin to withdraw money early in order to maximize the amount of interest and to ensure that you get full returns on your investments.
The third major category of fixed-income annuity is called a non-taxable, or tax-deferred annuity. With this annuity, the annuitant has to begin to withdraw funds at the age of 65. If you start withdrawing too early, you will have to pay back some of the tax benefits, which could ultimately lower your lifetime tax benefit.
Once your annuitant reaches his or her specified retirement age, you can convert your fixed income annuity into a tax-deferred annuity and begin to make the traditional monthly or even yearly annuity payments on this annuity. Once you reach the end of your life expectancy, the annuitant is able to withdraw funds from their annuity for investment purposes, and continue to make the same type of annuity payments in their final years.
For those who are looking to cash in their annuities, there are two major types of annuity that offer potential to cash in your fixed-income annuities. These include: a rollover annuity and deferred cash out plan.
In a rollover annuity, the annuitant can immediately rollover their annuity payments into the rollover account. A rollover annuity allows the annuitant to receive a one-time payment from their annuity to their rollover account. After that, the annuitant is left with a new lump sum to invest in another fixed income annuity. In a deferred cash out plan, the annuitant waits to receive a cash out payment from their annuity until they reach retirement. When they reach retirement, the annuitant transfers their annuity to their deferred cash out plan.
The last option to cash in your annuities is a modified universal life annuity. This type of annuity offers you the opportunity to convert your fixed income annuity into a cash value. At any time within a specific range. You would rollover all or part of your fixed-income annuity payments over into this plan, which allows the annuitant to receive a predetermined amount of cash value in their account.
You should carefully consider your options when considering how to convert your annuity payments. Although converting your fixed income annuities into a cash value may seem like a good idea, you should also know that if you fail to make your interest payments, you will lose any tax benefits that you may have received from the tax-deferred annuity. If you are in your golden years, you may not wish to spend money in a fixed income annuity that gives you no return at all, as the interest payments may only be a small fraction of your eventual investment returns. Instead, you should focus on investing in a non-taxable annuity product.
While traditional retirement plans may offer a large cash value, you should also consider the fact that they require you to begin withdrawing cash payments at the beginning of your retirement years, which is often very difficult for people who are still employed to handle on a regular basis. Also, if you decide to sell your annuity, there are fees and commissions that you will pay, which are more common with a traditional annuity than a rollover annuity. Thus, you should seriously consider the pros and cons of both traditional and rollover annuities to decide which option is best for your individual situation.