Annuities explained – Questions About Annuities and the Tax-Deferral Benefit

Top 5 Questions About Annuities

What is an annuity?

An annuity is a contract between you and an insurance company that provides the opportunity to grow your money tax-deferred and can offer protection for your retirement income stream.

What are the benefits of an annuity?

An annuity can provide you with benefits that may not be found in other retirement savings products.

Some annuity benefits include:

  • Tax-deferral. Any gain or interest in an annuity can grow tax-free until you withdraw it — typically after retirement, when you are likely to have a lower tax rate than in your prime earning years. Withdrawals are subject to ordinary income tax and may be subject to a 10% federal penalty if taken before age 59 1/2.
  • No IRS limits on contributions. Unlike Individual Retirement Accounts (IRAs), 401(k) plans, and other tax- deferred plans, there’s no limit from the IRS on the amount of money you can put into an annuity.
  • No mandatory withdrawals. Unlike some qualified retirement accounts, you are not required to begin receiving payments at age 70 1/2. Keep in mind that annuities owned within a Traditional IRA are subject to the required minimum distribution rules.  (Contract terms may require you to start taking withdrawals at a certain age, such as 95).
  • Many features available. Annuities can be set up with a wide variety of features, such as equity based investments, guaranteed fixed rates, lifetime income for you and your spouse, and benefits to your beneficiaries.
  • Diversify your retirement portfolio. By putting some of your retirement assets in an annuity, you are diversifying the types of retirement planning products that you have.
  • Bypass probate and ease estate planning. Your annuity proceeds will pass directly to your named beneficiary upon your death.

You should consult your tax advisor about your particular situation.

What are the fees or costs?

There are many types of annuities available and different features that you can select, each with different investment and pricing options. We are here to help you decide if an annuity is right for you, what features may be appropriate for your specific retirement needs, and how much it costs.

How does an annuity differ from other insurance products or investments?

First, annuities offer tax-deferred savings, which most other forms of investments do not offer — (other than 401(k)s and IRAs, which have investment limits). With tax deferral, you may find your investment grows faster, since earnings are reinvested without being reduced by taxes.

Annuities also differ from other investments in other important ways:

  • You can select an annuity that includes features such as return of principal or income protection (to protect against downside market risk) or guaranteed fixed rates. These features may be available at an additional cost.
  • When you reach retirement, annuities give you the option to convert your investment into a guaranteed stream of income that may last for the rest of your life.

Is an annuity right for me?

An annuity may be a good fit for your retirement savings needs if you:

  • Have maxed out your other tax-advantaged retirement savings options, such as your 401(k) or IRA
  • Are looking to save more for your retirement in a way that provides you tax advantages
  • Are looking for a way to diversify your retirement savings portfolio
  • Expect to withdraw the retirement funds after age 59 1/2, which is an age limit set by federal regulations. If you withdraw funds before age 59 1/2, you may be assessed a tax penalty and other withdrawal fees.
  • Expect your income tax bracket in retirement to be the same or lower than it is today

Tax-deferred savings with an annuity

How does tax-deferred savings with an annuity work?

When you set up an annuity, you agree to make either a single investment or a series of investments over time — called premiums.

The annuity may offer a fixed interest rate with return of principal and a minimum guaranteed rate of return. Or you may want to select an indexed or variable product that provides you the chance for market growth.

At a later point in time — usually as you enter retirement — you can withdraw funds as needed, or set up a regular payment schedule for a given time period, guaranteed by the issuer (which is an insurance company).

What types of annuities offer tax-deferred savings?

Three popular types of annuities for tax-deferred savings are:

  • Index Annuity. May be a consideration if you want an investment that is tied to a market index performance without direct exposure to the market.
  • Fixed Annuity. May be a consideration if you want to increase your tax-deferred earnings with low-risk investments and are comfortable with moderate returns.
  • Variable Annuity. May be a consideration if you want direct access to equity and bond investments with optional lifetime income or death benefits. Learn more with our in-depth variable annuities brochure (PDF)*.

Compare Annuities to see which may be best for you.

Are there other things to consider with this type of investment?

Yes. While there are benefits to an annuity, there are some additional items to consider, including:

  • Surrender penalties. Most annuities come with surrender penalties (often called a Contingent Deferred Sales Charge, or CDSC) to discourage early withdrawal. This may mean that you need to pay a fee in order to access your funds. Most annuities, however, include a feature that allows you to access funds, within certain parameters.
  • Withdrawals begin after age 59 1/2. If you withdraw your money before age 59 1/2, you may be subject to a 10% federal tax penalty.
  • Withdrawals are taxed at ordinary income rates. Unlike some other investments, withdrawals taken from annuities are taxed at ordinary income tax rates, rather than capital gain or dividend tax rates.
  • Tax implications for beneficiaries. Beneficiaries may owe income taxes on any gain in the contract at death of the owner when the money is distributed. Beneficiaries may have several options in how they receive the payout, however.
  • Guarantee by issuing company. The guarantees included with annuities are subject to the claims-paying ability of the issuing insurance company. If the insurance company is unable to meet the claims, the payments may not be made. This means that you want to buy an annuity from a stable and secure company. Wells Fargo Advisors actively reviews the products and strength of the insurance companies whose annuities we offer.

Purchasing an annuity

What happens during an annuity consultation?

A Wells Fargo Advisors annuity consultation helps you understand everything you need to know about annuities before you make any decision. Three main things happen in an annuity consultation.

  1. Your Wells Fargo Advisors Financial Advisor will review your retirement goals and explain how an annuity may help you meet those goals.
  2. You and your Financial Advisor will discuss various annuity options available, including different annuities, optional add-on features, and price information.
  3. You’ll learn about the insurance companies backing the annuities, as well as how much monthly income you can expect from a certain investment.

After an initial consultation, you can expect several follow-up conversations with your Wells Fargo Advisors Financial Advisor so you have all the details of the annuities that may be a good fit for you, and you can weigh your options effectively.

To get started, call 1-866-246-5056 to speak with one of our experienced Wells Fargo Retirement Professionals or request a consultation online, which can help assess your situation and connect you with a Wells Fargo Advisors Financial Advisor.

Should I buy a fixed or variable annuity?

Determining which type of annuity to buy depends on your investment preferences and your risk tolerance level.

  • A fixed annuity provides a guaranteed payout stream that will not fluctuate based on market performance.
  • A variable annuity may have more potential for growth and provide more choice and control over investment allocations, but the underlying investments are subject to greater market risk.

Our Financial Advisors can work with you to determine how an annuity may strengthen your overall retirement savings portfolio, discuss investment opportunities, and help you determine the level of risk that is comfortable for you.

Can I access my money after it’s invested?

Most deferred annuities allow you to make a full or partial withdrawal at any time, although there may be a fee if you withdraw over a specified limit. Withdrawals prior to age 59 1/2 may be subject to a 10% federal tax penalty, in addition to ordinary income taxes. Immediate annuities provide an income stream right away, but typically allow little or no access to the account value.

Why choose Wells Fargo for my annuity?

We use a rigorous review process to select insurance companies to offer you some of the top-tier annuity providers in the industry. Wells Fargo Advisors will work with you to select the right annuity to complement your overall investment portfolio.

How do I buy an annuity through Wells Fargo?

To get started, call 1-866-246-5056 or use our online form to request a consultation with one of our experienced Wells Fargo Retirement Professionals who can help assess your situation and connect you with Wells Fargo Advisors.

Variable annuities are long-term investments suitable for retirement funding and are subject to market fluctuations and investment risk.