Consider the tax benefits of annuities in retirement planning
October 19, 2010 by N/A
– Monday, October 18, 2010
The economic downturn has more Americans concerned with their retirement savings, but many are hesitant to reinvest in the stock market. Recent studies show that older Americans in particular are shying away from traditional stocks and bonds and focusing on building their savings. Young adults, once thought to be more carefree with their money, are also opting for conservative investments through CDs and money market funds. Despite the new investment trends, annuities remain largely popular among middle-aged and older adults, largely because of the tax benefits they offer.
Annuities allow individuals to put down a lump-sum which will be paid out in monthly payments for the remainder of the consumer’s life. Consumers can choose to purchase an immediate annuity, which begins making payments to the investor immediately, or a deferred annuity, which is allowed to grow for a set period of time. Consumers can also choose fixed or variable annuities, which will determine whether the payouts are a fixed sum or tied to market performance.
Annuities are popular because they provide a safety net and guaranteed source of income for recipients, ensuring that retirees will be cared for when their savings or pensions run dry. But Americans also turn to annuities because the investment grows on a tax-deferred basis. When individuals begin withdrawing their annuity, their initial investment is not taxed. However, the investment earnings will be taxed at the normal income tax rate.
Because taxes play such a large role in Americans’ retirement savings, more consumers are turning to their tax preparers for advice when making investment and retirement account decisions. Although young adults in their 20’s and 30’s may feel that retirement is a long way off, sitting down with a tax professional to discuss their investments may help them maximize their benefits in the future.
Financial professionals strongly encourage Americans approaching retirement age to meet with a tax preparer as well to explore ways to boost their income. For example, few older adults are aware, or take advantage of, catch-up contributions, which allows individuals over 50 to increase their contributions to their 401(k) or retirement account.
Adults should keep their investment portfolios in mind during filing season to avoid missing out on benefits that may boost their retirement income.
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Liberty Tax Service provides computerized income tax preparation and electronic filing. Each tax office offers customers audit assistance, a money back guarantee, and free tax return checking.
