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top of any taxes and the tax penalty for withdrawal prior to age 59½. A surrender fee applies regardless of age and is a penalty that must be carefully understood. The penalty amount can run into the double-dig- it percentages and last for 10 years.
Types of annuities Generally, there are three types of an- nuities — those like a nondeductible traditional IRA, like a CD, or like a pension with a stream of income. The nondeductible traditional
Pension income and the term annu- ity are synonymous. However, in the financial world, annuities are much more than just a stream of income.
General information Annuities can be either savings or in- vestment accounts — savings accounts pay interest, while investment ac- counts are tied to the stock and bond markets. Insurance companies de- velop and offer annuities. But insur- ance companies, banks, credit unions, investment firms, online brokerages, financial advisors, and anyone with a license to sell investments or insur- ance products can sell annuities. The federal government does
not insure insurance companies, so there’s no FDIC guarantee. Insur- ance companies back the principal and rate guarantees themselves. The financial rating of the insurance firm is your assurance of safety. Look to do business with a solid insurance firm with a great reputation and earning top financial ratings. Annuities can be bought in many
varieties to accomplish different savings objectives. Every insurance firm adds its own bells and whistles, making comparisons difficult even between similar products and further causing confusion over annuities. You can find “saving” annuities that pay better interest rates than other
64 MI L ITARY OFFICER JULY 2011
interest-bearing accounts like money markets, CDs, or short-term bonds. It’s these guaranteed higher-interest- rate annuities that get attention dur- ing low-interest-rate economies. Annuity account deposits can- not be withdrawn until the owner turns 59½ years old. Owners face taxes and tax penalties for early withdrawal. All annuities have op- tions that allow them to provide an income stream, but most annuities aren’t used that way. Ask about the surrender fee — the penalty you pay for pulling your money out of the plan too early, typ- ically a percentage of the value of a withdrawal. The surrender fee is on
IRA-type annuity basically is a third-tier retirement savings ve- hicle (with 401(k)s ranked first and IRAs ranked second). These are called deferred annuities be- cause the potential income stream is deferred to a later date or not at all, because producing an income stream is not required. They come in versions called variable (invest- ment) versions and fixed (interest- rate) versions. Their name typically describes what they are, for example “flexible premium, deferred, variable” or “flex- ible premium, deferred, fixed” annu- ity. Because an annuity is an insurance product, the deposits usually are called premiums. However, how much you deposit
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NNUITIES CAN BE A SOURCE OF CONFUSION among consumers. For many people familiar with pension plans, use of the term annuity contributes to the confusion over annuity products.
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