What is an Annuity?

An annuity is a contract between an investor and an insurance company, purchased by the investor through either a single payment or a series of payments. Annuities can be either immediate, meaning that income and return of principal begin to be paid immediately, or deferred, whereby assets accumulate tax-free until withdrawals are made. Withdrawals are subject to federal income tax at ordinary income tax rates and may also be subject to state taxation. If money is withdrawn before the investor reaches the age of 59 ½, it may be subject to 10% penalty in addition to ordinary income taxes. Deferred annuities are best used for long term goals such as planning for retirement. For most investors it is advantageous to make the maximum allowable contributions to IRAs and 401(k) programs before investing in an annuity.

When you purchase a deferred annuity within a tax-qualified retirement plan such as an IRA or 401(k), you get no additional tax advantage from the annuity since earnings and income in such a plan are already tax-deferred. You should consider purchasing an annuity within a tax-advantaged retirement plan only if it makes sense because of the annuity’s other features such as lifetime income payments and death benefit protection.

There are two types of deferred annuities, fixed and variable.

Fixed Annuities

Fixed annuities guarantee an interest rate for a period of time, generally 1 to 10 years, and some contracts offer guaranteed minimum rates of return for the life of the contract. Fixed annuities are not subject to fluctuation in value as are variable annuities. Both principal and interest earned are backed by the financial strength of the issuing insurance company.

Variable Annuities

Variable annuities are complex investment vehicles that combine features of both insurance contracts and mutual funds. An investor in a variable annuity can choose from a wide range of mutual fund like investment portfolios, usually referred to as subaccounts. These subaccounts, with varying investment objectives and risk levels, can invest in stocks, bonds and money market instruments. Similar to mutual funds, the investment returns of these subaccounts fluctuate with market conditions. It is possible to experience a loss on your investment in a variable annuity.

As noted above, earnings within a deferred annuity grow on a tax-deferred basis. Income taxes that would have been paid on capital gains, interest, or dividends, are deferred until they are withdrawn from the contract. The value of a variable annuity may grow faster than a taxable investment with a similar rate of return, because money that would have been used to pay these taxes remains invested. It is important to realize however that when you withdraw money from a variable annuity, any portion subject to tax will be taxed at ordinary income rates rather than the lower tax rates that are currently applicable to long-term capital gains and certain dividends. Therefore the benefit of tax deferral may outweigh the costs of a variable annuity only if you use the annuity for goals such as long term retirement planning.

Variable Annuities offer many optional features that you may want to consider such as minimum death benefit and minimum living benefits. These features are backed by the financial strength of the issuing insurance company. They may be part of the contract or you may elect them at the time of purchase. Each optional feature that you choose typically carries a charge.

Please carefully read the contract and offering material, including the current prospectus, and consult with your Financial Consultant before investing.

Additional information is available on the Securities and Exchange Commission website

and the FINRA website