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www.privateairny.com Private Air | Spring 2021 38 receive the interest annually and pay tax or let it compound in the annuity and thus defer taxes. ere's one major caveat. If you withdraw money from an annuity of any type before age 59½, you'll normally owe the IRS a 10% penalty on the interest earnings you've withdrawn, plus regular income tax on it. If you're much younger than 59½, don't buy an annuity unless you're sure you won't need to take out money before that age. Annuities of all types are guaranteed by the issuing insurance company. ey are not FDIC insured. State annuity guaranty associations do provide a solid extra level of protection, however. Fixed annuities are suitable for both nonqualified accounts (savings that would otherwise be taxable) and in qualified retirement plans, such as IRAs, Roth IRAs, and 401(k) and 403(b) plans. Fixed indexed annuities offer potentially higher returns over the long term. Indexed annuities credit interest based on the growth of a market index, such as the S&P 500 index. e interest rate thus fluctuates annually. In up years, you'll profit. In down years, you'll lose nothing but won't earn anything. So, for example, in year one, you might earn 9%, 0% in year two, and 4% in year three, and so on. If you're okay with the risk of earning nothing some years, in the long run, you'll likely earn more interest than you'd get with a fixed-rate annuity. Indexed annuities are for people who want to save for the long term and limit their risk without precluding growth. ey're not typically suited for people who need steady income right away to cover living expenses. ink of them as a distinct third class in an asset- allocation plan: fixed-income (CDs, bonds, and other fixed annuities); equities (stocks and stock funds); and indexed annuities. Because there are different crediting methodologies and caps, it takes some research to compare and determine which indexed annuity is best suited for you. Work with an annuity specialist who has the necessary resources and training to assist you in this process. Income annuities produce much more guaranteed income. If you're looking for the most guaranteed income, here's an alternative you may not have thought of: an income annuity. Unlike fixed-rate or fixed indexed annuities, once purchased, income annuities have no accumulation value, so they don't pay a stated rate of interest. You pay a lump sum or a series of deposits to the insurer, which guarantees a stream of income. You choose how long the payments last—for example, you could select ten years. Most people, however, choose a lifetime annuity that will pay you (and optionally, your spouse) guaranteed monthly income no matter how long you live. Income annuities produce more income because each income payment is made up of both taxable interest and tax-free return of principal (your own money coming back to you). It's a bit like the flip side of a mortgage, where each payment you make includes principal and interest. A mortgage gets paid off eventually. However, lifetime income annuities keep on paying the same amount, even after the insurer has repaid your entire principal. Lifetime income annuities serve as longevity insurance. ey protect you against the risk of running out of money should you live into your 90s or beyond. Deferred or immediate payments—your choice. A deferred income annuity, which pays out starting on a future date that you choose, lets your money grow tax-deferred until you start receiving income. If you can afford to wait, it's usually the better choice because the deferred income payments will be larger than immediate payments. If you need substantial income soon, an immediate annuity can be a great solution. Typically, you'll start receiving monthly payments within about a month of purchase. Many insurers will let you delay the start by up to a year if you like. Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and immediate income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. He writes on retirement income and annuities regularly for several leading financial websites. A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356. WEALTH MANAGEMENT

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