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Beyond Income: Fixed Index Annuities for Wealth Accumulation

By Cathy DeWitt Dunn

With their consistent and reliable income payments, fixed index annuities are usually associated with creating a retirement income stream. But for non-retirees, fixed index annuities (FIAs) can also be used to accumulate wealth—a highly attractive option for someone looking to grow their assets while neutralizing market-based risk.

As fixed index annuities have grown in popularity, their utility as a wealth accumulation option has gained greater notice. In fact, many FIA providers now create contracts with a wealth goal in mind. Here we take a closer look at how FIAs can be used to grow your money.

Choosing among savings options

There are always trade-offs when choosing where to safely grow your money. For those who are early or mid-career, and retirees with alternative sources for income—i.e., people who can let their money sit for longer periods of time without withdrawing it—FIA’s returns coupled with their mitigated risk can make them a very attractive option for wealth accumulation. Many of today’s fixed index annuities can offer significantly higher growth than other fixed or principal protected investment options.

Certificates of deposits (CDs) are one popular savings option. But the average annual percent yield on CDs today hovers around the 2.5%—considerably below that for FIAs. And the interest on CDs is not tax-deferred—it’s taxed each year.

Other retirement accounts—like IRAs and Roth IRAs—offer tax-deferred returns, but their low contribution limits mean it takes longer to build up a significant balance.

Bridging the benefits of both these options, fixed index annuities offer higher growth potential, the elimination of market risk, and no limit to how much you can deposit. Plus, a percentage of the accumulated value can be withdrawn each year—sometimes in as soon as 30 days. These benefits depend on what is outlined in the annuity contract, the terms of which can vary significantly between insurance companies and their different product lines.

Though these funds are available for withdrawal, there are caveats: some FIA contracts stipulate how much money is available for withdrawal without penalties on an annual basis. And so, while fixed index annuities have many benefits for accumulating wealth, they are not for those who think they may need to access all of their money before the contract expires—usually 7 to 10 years. IRS penalties may also apply if funds are withdrawn prior to age 59 ½.

wealth accumulation

Choosing an FIA for growth

Not all FIA contracts are created equal. Clients interested in FIAs as a wealth accumulation option do not need an annuity packed with income value growth guarantees that come from income riders. By eliminating unnecessary features, fees also fall by the wayside.

Knowing the major differences among contract variables helps guide the choice of a fixed index annuity.

Funding a fixed index annuity for wealth accumulation is no different than funding it for use as an income stream: the annuity can be funded with either qualified money—like IRAs, 401(k)s, pensions, and others—or non-qualified money—like cash or money from a trust fund. Whether qualified or non-qualified, all the principal in the account grows tax-deferred. That’s more money for the contract holder, and less going to the government.

And similar to an FIA for retirement income, the annuity owner chooses their crediting options. Newer FIA products can offer highly appealing benefits, including “uncapped” growth strategies, where there’s no maximum on account gains. Earlier FIAs placed a limit or “cap” on the contract’s upside. Newer products can also offer 100% participation rates, wherein the contract receives all of the index upside.

With all fixed index annuities, the owner can choose a new strategy at the end of every crediting period—this feature does not change whether the annuity is being used for income or wealth accumulation. Also like all FIAs, the account gains are always locked-in and protected against loss—the account balance only decreases with a withdrawal.

At the end of the contract period, the annuity holder can withdraw the FIA’s full value and redeploy the funds however they wish—from a new FIA to other tax-deferred instruments to traditional investment assets. There’s more wealth to spread around.

Work with an expert who can best match your specific goals to the annuity products that are right for you. For more information, get in touch with DeWitt & Dunn today.

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