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Fixed annuities are designed to help you reach your long-term goals by providing a guaranteed return for a set period of time. They may be a good addition to a retirement strategy, but it's important to understand how they work.
When you invest in a fixed annuity, you pay a lump sum to an insurance company. They then guarantee a stated rate of interest over a specific period of time. The interest accumulates on a tax-deferred basis, meaning you do not pay tax on the interest until you withdraw it or take it as income.
There are several key features to consider with a fixed annuity.
Generally, fixed annuities are purchased with a single payment. The account value grows tax deferred at the guaranteed rate. When you decide to take the earnings, they are taxed as ordinary income.
Your money is invested for a specific period of time, which you select based on your investment time horizon.
The value of your fixed annuity increases when interest is added to your contract.
You can take income from a fixed annuity in a number of ways:
Fixed-annuity proceeds paid to the beneficiary upon death are excluded from estate probate. However, any tax-deferred earnings in the contract will be subject to ordinary income tax, and estate taxes would apply to the total value of the contract, if applicable. The payout at death is generally the accumulated value without any imposed charges or market value adjustment.
Most fees and expenses of a fixed annuity are factored into the stated annual percentage rate the client is quoted. The rate quoted is the rate paid. Fixed-annuity fees and expenses generally cover the insurance company’s administrative expenses, the cost of offering the annuitization guarantee, and profits to the insurance company and agent. Some fixed annuities may assess an annual contract fee, typically around $30.
We recommend fixed annuities as long-term investments designed for retirement savings or as part of an overall fixed-income portfolio. Annuities can offer unique ways to provide income during retirement, including guaranteed lifetime income. Make sure to talk to your financial advisor to learn more about your investment options and whether an annuity may be appropriate based on your long-term goals.
Guarantees are subject to the claims-paying ability of the issuing company.
Withdrawals taken prior to age 59½ may be subject to a 10% federal tax penalty. Surrender penalties are usually assessed if you withdraw all or a portion of your principal during the guarantee period. Such withdrawals may also be subject to a market value adjustment. Some fixed annuities provide waivers for surrender charges under special circumstances, such as a nursing home stay. Ask your Edward Jones financial advisor which fixed annuity may be right for you.
Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation. This content should not be depended upon for other than broadly informational purposes. Specific questions should be referred to a qualified tax professional.
Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P., and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C.
Edward Jones receives payments known as revenue sharing from certain mutual fund companies, 529 plan program managers and insurance companies (collectively referred to as “product partners”). For more information see Revenue Sharing Disclosure.
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