The Indexed Annuity
An equity-index annuity (or fixed indexed annuity) is a type of tax-deferred annuity whose credited interest is linked to an equity index, typically the S&P 500. It guarantees a minimum interest rate (typically between 1% and 3%) and can participate in a portion of market growth.
Indexed Annuity Advantages
- Returns linked to the market
- Minimum guaranteed rate
- Low risk
- Available for short, medium, or long term (1-10 years)
- Tax deferral
- Unlimited contributions
- Life insurance (optional)
- Annual tax-free gifts of up to $13,000 per individual
Indexed Annuity Disadvantages
- Withdrawing income before the age of 59.5 results in a 10% IRS tax penalty.
- Although tax-deferred at first, income is eventually taxed at ordinary rates.
- Some index annuities charge a 1-3% annual management fee.
- Withdrawals exceeding the annual allowance incur an insurance company penalty.
- Earnings diminish when withdrawn early.
