A fixed annuity is becoming a popular choice for current or soon-to-be retirees, especially those who want to be able to plan for their own and their family’s future accurately. Fixed Annuities provide a guaranteed stream of income that will not fluctuate up or down with the market, which can be appealing to some. This means that your interest will not go down, but it also won’t go up.
A fixed annuity is one of 4 different types of annuities, and within those types, there are subtypes as well. Thus, there are three different kinds of fixed annuities; traditional fixed annuity, index fixed annuity, and multi-year guaranteed fixed annuity. This article will go over the differences between the three types of fixed annuities and how they may benefit you and your loved ones.
Traditional Fixed Annuity
A traditional fixed annuity is a type of annuity that will credit you a specific interest rate which is contracted one year at a time. Every year, the interest rate will be reevaluated, but you are only guaranteed to receive the minimum amount that was agreed upon when setting the terms.
A traditional fixed annuity receives the same type of tax deferment that all annuities do, so you do not have to pay taxes on the interest you make until you withdraw it from the account. You have the flexibility to withdraw a small amount as needed or cash out your annuity at any time. However, you may be subject to fees for removing the money before the allotted time has passed.
Traditional fixed annuities can also sometimes be called single-year guarantee annuities. It can be a gamble once the one-year mark has passed on just what kind of interest rates you will be looking at maintaining.
Depending on your specific needs, a traditional fixed annuity may or may not be the right choice for you. Be sure to do your research on the products and the companies you may potentially buy from before making a decision.
Fixed Index Annuity
A fixed index annuity bases its return amount on the performance of a stock market index, such as the S&P 500. It is similar to investing in index funds, except a fixed index annuity protects you against principal loss. This type of annuity still offers you a guaranteed minimum return, but the longer you have to let your money grow, the more chance you have at a better return.
Fixed index annuities can be a little more complicated than other annuities or even a traditional fixed. The return is based not on actual investments but simply performance. There is also the chance that the company you select will limit your return by participation rates or performance caps.
Because of its tax-deferred status, withdrawal from a fixed index annuity will likely result in a fee or penalty if you are younger than 59.5 or before the contracted time is up. So be sure to read all the fine print and know all of your options before buying.
Multi-Year Guaranteed Annuity
Multi-year guaranteed annuities (MYGAs), also called fixed-rate annuities or CD annuities, are fixed annuities that provide a guaranteed interest rate for an extended period, usually 2-12 years. MYGAs share some similarities with certificates of deposit but generally have better interest rates and are more flexible about withdrawing the funds.
Essentially, it is a traditional fixed annuity with a more extended contract. It is the same guarantee for a long length of time. The only downside to this, as usual, is that the interest rate may not keep up with inflation rates over the years.
With a multi-year guaranteed annuity, you have the flexibility of being able to withdraw part of your money without penalty up to once per year. This can be extremely useful for things like medical payments or loan payoffs.
This type of fixed annuity also allows you to purchase the contract with either non-qualified or tax-qualified funds like an IRA. You also can ensure your funds are passed on to your named beneficiary in the event of your passing, saving your loved ones the hassle of probate court.
Which Fixed Annuity Is Right For Me?
While a fixed annuity can be an excellent option for someone looking to build their retirement savings without risk, the many different types and categories can be confusing. You deserve the peace of mind of knowing that your retirement is being built up day by day, and Matador Insurance Services has many resources available. Furthermore, there are experienced consults on hand for any of your questions.
Speak with a Matador Insurance consultant online today; they would be happy to walk you through all annuity options and the process involved in determining the best option for you.