Anuity

photo credit: AchimH

Most people worry about investing in an annuity because the product seems foreign to them. While the terminology is different and sometimes a little confusing, a fixed annuity is really nothing more than a CD with more benefits. It tax-defers your interest and gives you the option to take payments you’ll never outlive.

Most of the time, the owner and the annuitant are the same person. Just like a CD there are penalties for early withdrawal. The insurance companies call them surrender charges instead of penalties. Unlike a CD, however, you can often access a portion of your principal from many annuities without a fee.

Insurance companies are businesses and in order to earn the right to service customers, they had to make the product more attractive. Today, annuities for those approaching 59 ½ or older are often far more practical than the average CD. Since the product is for retirement and you get a tax shelter, it has a 10 percent tax penalty for people under the age of 59 ½ who remove their money, just as an IRA does so it often doesn’t suit the young investor.

If you’ve already found how easy life becomes when you invest in an annuity, you may be in the shopping mode to find another or simply find one with a better rate or interior design. Changes and improvements create a need to periodically look at your present product. There are special steps you must take to avoid taxation when you transfer funds from one annuity to another. Make certain that your agent follows these steps.

The representative must fill out a state replacement form and you must sign it. This notifies the Department of Insurance that you’re transferring funds. It also notifies your old company that you’re switching. Be wary of any agent that doesn’t fill out the form. It’s against insurance law for them to omit it.

The representative then fills out a section 1035 Exchange form. These forms tell the government that you aren’t receiving the funds but transferring them directly into another policy. If you take receipt of the funds, you pay taxes on the growth. This form guarantees that you’ll get to defer the taxation.

After you fill out the paperwork for the new annuity, the representative sends all the forms to the appropriate place. You’ll have time to consider the transaction and probably receive notification from your old company. That’s not bad, however. You should already know why you transferred the funds, but if you signed in a moment of confusion, talk to your old agent and see what they have to offer. If they have a better product, ask why he never showed it to you before this time.

Whether you’re investing for the first time in an annuity or transferring funds from another product, always keep good records. When you start to remove funds, you’ll need to know what your original basis was. That simply means, how much money did you put into the annuity. Your basis is the amount you put into the first annuity if you do a transfer. You’ll need this at tax-time if you take funds out to use.

No matter whether you’re a first time annuity purchaser or an old hand at annuities, it pays to get several different annuity quotes and shop for product features that fit your needs. By doing this, you’ll have the best annuity for your situation.

John C. Ryan is an expert in the field of annuities [http://bestfixedannuityquote.com/ABOUT-ANNUITIES.html] and other investment tools for retirement. Annuity insurance has been around for a number of years, but has grown increasing popularity due to the recession, and the increasing number of retirees in the US. Come see us for more anuity information and analysis.