In a Traditional Fixed Annuity type of annuity contract an interest rate that is declared is credited one year at a time. Sometimes, in the first year itself, you are offered an upfront interest enhancement. Thereafter, your interest rate will be fixed on an annual basis. Traditional Fixed Annuities, guarantee you to receive at least the contractually guaranteed minimum interest rate every year. The minimum rate is guaranteed though you may earn interest at a higher rate than the minimum.
Traditional Fixed annuities are afforded special tax treatment, which is in all annuities. Income tax is deferred and you are not taxed on the interest that your money earns until it is withdrawn. Moreover, as per your needs, you can take partial withdrawals, complete cash or surrender your annuity. You decide when to take income from your Traditional Fixed annuities. Therefore, when to pay taxes to gain increased control over your taxable income.
About Annual Interest
Traditional Fixed annuities are also called single-year guarantee fixed annuities. This is because after the first year you get an annual interest. This proves the trustworthiness of the insurance company and how long it has given interest over the years. This is the only way you can ensure if an insurance company has been fair with the policyholder. An often touted selling point with traditional fixed annuities is, when interest rates are increased, so will the crediting interest rate on your contract. This is one guarantee that gives you the opportunity to take advantage of higher interest rates should they occur.
It’s an astonishing fact, which reveals that in a rising interest rate environment, a majority of traditional fixed annuities do not earn increased credit rates that you hope for. There are few annuity firms that offer competitive renewal rates. Whereas, in others it is barely above the contracted guaranteed minimum.
The competitive annuity marketplace is one place that helps you to know that insurance companies are honest with their renewal interest rates. If the renewal rate offered on an existing traditional fixed annuity is too low, you may surrender your contract agreement. Thereafter, invest your money into a new higher-yielding traditional fixed annuity. Mostly, insurance companies will not allow this to happen. They will offer a renewal rate that is sufficient to make you keep your money and retain the business. However, you should keep in mind that charges applied to withdrawals are made prior to the end of the surrender period of the investment.
The bottom line is that depending on your individual needs, a traditional fixed annuity can be an appropriate purchase. The thing to consider is that if you withdraw your money early you can incur surrender charges.
The benefits of traditional fixed annuity:
- It offers Tax-deferred growth until you make a withdrawal
- Competitive current and renewal interest rates provide stability
- Ability to satisfy IRS Required Minimum Distribution (RMD) immediately
- Benefits not guaranteed and subject to change
- Systematic withdrawals of interest available immediately
- Options to increase liquidity availability may vary by state
