🏛️ Introduction

Planning for retirement means more than just saving—it means turning your savings into steady, lifelong income. Annuities can play a powerful role in that strategy. In this guide, we help you understand how annuities work, what types may fit your goals, and how to avoid costly mistakes.

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💡 What Is an Annuity?

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An annuity is a contract with an insurance company where you pay a lump sum or a series of payments in exchange for regular income, either now or in the future. Annuities are designed to protect against the risk of outliving your money.

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📊 Types of Annuities

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1. Fixed Annuities
A Fixed Annuity offers guaranteed interest rates and steady income. This means your principal and interest are protected from market fluctuations, and you’ll earn a predictable rate of return. It’s essentially a low-risk way to grow your retirement savings and provides a guaranteed income stream during retirement. Ideal for conservative investors.

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2. Fixed Indexed Annuities
Returns are linked to a market index (like the S&P 500) but with downside protection. A fixed index annuity (FIA) is a type of deferred annuity that offers growth potential based on the performance of a market index, like the S&P 500, while also providing principal protection. It combines features of both fixed and variable annuities, offering a balance between growth potential and downside protection.  Popular for balancing growth and security.

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3. Variable Annuities
Returns depend on investment performance. A variable annuity is a long-term investment, often used for retirement, that allows your money to grow on a tax-deferred basis and provides a stream of income, potentially for life, based on the performance of underlying investments. It’s an insurance contract that offers a variety of investment options, typically mutual funds, with the potential for higher returns but also subject to market risk. These carry more risk and higher fees.

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4. Immediate vs. Deferred Annuities

Immediate annuities start payments right away. Deferred annuities grow your money tax-deferred before payments begin later. An immediate annuity provides income payments beginning shortly after purchase, typically within a year, often funded by a lump sum. A deferred annuity accumulates value over time through premium payments, with income payments starting at a later date, potentially years in the future. 

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​✅ Benefits of Annuities

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• Lifetime Income: You can create a guaranteed paycheck for life.

• Tax Deferral: Your money grows tax-deferred until withdrawn. Tax treatment of contributions and withdrawals depends on how the annuity is funded:

        1.  Qualified annuities: Funded with pre-tax dollars, which means there is a tax benefit for contributions. Withdrawals in retirement are subject to ordinary income tax.

       2.   Non-qualified annuities: Funded with post-tax dollars. Withdrawals in retirement are tax-free.

• Principal Protection: Certain types shield you from market loss.

• Estate Options: Choose beneficiaries and optional death benefits.

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⚠️ What to Watch Out For

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• High Fees: Watch for administrative, mortality, and rider fees. We will guide you through the fee structure.

• Liquidity Limits: Some have surrender charges if you withdraw early. There is normally a fee schedule for early withdrawal depending on the year in which the withdrawal takes place. Often, 10% of the annuity value is available for withdrawal without penalty.

• Complex Terms: Not all annuities are easy to understand—get help.

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🧭 Is an Annuity Right for You?

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Consider an annuity if you:

• Want guaranteed income you can’t outlive?

• Are within 10 years of retirement or have already retired.

• Seek protection from market volatility.

• Prefer a predictable monthly income.

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​🤝 How We Help

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• At Valley Forge Advisors, we guide you through the entire process:

• Evaluate your retirement goals and risk tolerance.

• Explain the best annuity options clearly and honestly.

Recommend solutions that fit your financial life by evaluating the following:

1.        Time horizon: How far away is your projected retirement? This will determine the accumulation period before you can withdraw funds.

2.        Risk Tolerance: Do you want predictability, low market exposure, protected downside, and guaranteed income, or do you mind market exposure in exchange for higher returns?

3.        Income Sources: What mix of income streams and assets contributes to retirement income? Annuities can stabilize income.

4.        Living costs: We will apply an inflation factor and estimate other retirement expenses to clarify the income needed. We will ensure there is sufficient income to cover essentials and that there is a lifetime income.

5.        Annuity Types: Based on the discovery and annuity types explained above, we will make appropriate recommendations for your specific circumstances.

6.        Annuity comparisons: We will provide several options and agency ratings from AM Best and/or Moody’s.

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Let's Build Your Future - Wisely

Click on the link to schedule an appointment.

​Get a free, personalized annuity consultation. No pressure. No obligations.
📅 Book online: https://calendly.com/friis-valleyforgeadvisors/30min

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​Annuities can be part of a retirement tax strategy, offering several tax benefits and considerations: 

1. Tax-Deferred Growth:

• Growth accumulates without annual taxation: With an annuity, your earnings, such as interest, dividends, or capital gains, are not taxed as they grow within the contract. This contrasts with regular investment accounts where you might owe taxes each year.

• Compounding effect: This tax deferral allows your money to grow faster through compound growth, as taxes are not subtracted from your account value during the accumulation phase. 

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2. Taxation at Withdrawal/Payout:

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• Qualified Annuities: If your annuity is funded with pre-tax dollars (e.g., through a traditional IRA or 401(k)), all withdrawals or payments are taxed as ordinary income in the year you receive them.

• Non-Qualified Annuities: If you use after-tax dollars, only the earnings are taxed as ordinary income upon withdrawal.

  • Withdrawals (non-annuitized): The IRS uses the LIFO (Last In, First Out) method, meaning earnings are considered to be withdrawn first and are fully taxable until they are exhausted. After that, withdrawals from the principal are tax-free.

  • Annuitized Payments: A portion of each payment is considered a tax-free return of your original principal, while the rest is taxed as ordinary income. The taxable portion is determined by an exclusion ratio based on your investment and life expectancy.

• Roth Annuities: These are funded with after-tax dollars, and both contributions and qualified earnings can be withdrawn tax-free, according to Western & Southern. This is similar to a Roth IRA, where withdrawals are tax-free after certain conditions are met (e.g., age 59 1/2 and a five-year holding period). 

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3. Strategies for Tax Optimization:

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• Strategic Withdrawal Timing: Deferring withdrawals until a lower tax bracket in retirement can reduce the tax impact. Taking smaller, spaced-out withdrawals can also help avoid being pushed into a higher tax bracket.

• Coordinating with Other Income Sources: Consider how annuity payments interact with other taxable income, like Social Security. Drawing from different sources strategically can help manage your overall taxable income.

• 1035 Exchanges: This allows tax-free exchanges of certain insurance products, like a non-qualified annuity for another annuity, without triggering immediate tax liability on accumulated gains.

• Annuitization: For non-qualified annuities, annuitizing payments can spread the tax burden over your lifetime through the exclusion ratio, compared to having earnings taxed first in withdrawals. 

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4. Potential Tax Pitfalls:

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• Early Withdrawal Penalties: Withdrawals before age 59½ can incur a 10% federal tax penalty on the taxable portion, in addition to regular income taxes. Certain exceptions may apply, so consult a professional before taking early withdrawals.

• Required Minimum Distributions (RMDs): Qualified annuities in tax-advantaged accounts like traditional IRAs or 403(b)s are subject to RMDs once you reach a certain age (currently 73, or 70½ for those born before July 1, 1949). Failing to take RMDs can result in a significant tax penalty.

• Beneficiary Taxation: Inherited annuities are generally subject to taxation, with the rules varying depending on the type of annuity and the beneficiary's relationship to the owner. 

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Important Notes:

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• Tax rules for annuities can be complex, and it is highly recommended to consult with a tax professional or financial advisor for personalized advice and to ensure you are meeting all legal requirements.

• While annuities offer tax deferral, you cannot completely avoid paying taxes on them. You will eventually pay taxes on the earnings and/or pre-tax contributions when you start receiving payments or withdrawals.

• State taxes on annuity income vary, so check with your state tax agency or a tax professional for guidance. 

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Let's Build Your Future - Wisely

Click on the link to schedule an appointment today.

Book online: https://calendly.com/friis-valleyforgeadvisors/30min

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