Fixed Vs. Indexed Annuities

Fixed annuities are an excellent vehicle for providing a very competitive return while still avoiding the risk of loss of principal. In addition to providing safety and security, an added benefit is that your money grows tax deferred. This means you control when taxes are paid. This is a great benefit to have when you are engaged in your tax planning. Fixed annuities are generally targeted towards seniors, as there is a 10% IRS penalty for withdrawing funds from an annuity before age 59 ½. Fixed annuities can be classified into two broad categories, Multi Year Guarantee Annuities (MYGAs) and fixed indexed annuities.

MYGA’s operate like certificates of deposit. You get a specified interest rate for a certain period of time. For instance, you might receive 3% for 5 years. So, no matter what happens in the economy, you get the exact same interest rate for the full duration of the annuity period.

While MYGAs are very competitive compared to other conservative income options, the interest rate is still low. With interest rates being so low, right now 1.5% to 3.0% is the typical range for a MYGA.

Index annuities, on the other hand, provide more upside growth potential. The difference is with a MYGA you know exactly what you will receive. With an index annuity it is based on whatever underlying index it is tied to. The risk in an index annuity is if you have a year where the underlying index is negative. In this situation, at worst you stay where you are. Your original principal is never at risk no matter how far the market drops. A good feature is that any year you have gains, this is locked in for good. Typically, you can expect to receive an average return of between 3% and 7%. It should always be noted that an indexed annuity fits into the fixed income part of your asset allocation. Even though you may see the word equity index, your return will be more similar to the bond portion of your portfolio.

If you are interested in either a MYGA or index annuity in order to get a very competitive growth rate with no downside risk, please contact our office.

Investment advisory services offered through Virtue Capital Management, LLC (VCM), an investment adviser registered with the U.S. Securities and Exchange Commission. VCM and BW Wealth Management are independent of each other. Insurance and annuity products are not sold through Virtue Capital Management, LLC (VCM). VCM does not endorse any annuity or insurance products nor does it guarantee any annuity or insurance products performance. Any guarantees mentioned are backed by the financial strength and claims paying ability of the issuing insurance company and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Index or fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer. Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.