The Fixed Index Annuity
The Fixed Indexed Annuity (or FIA) is a powerful tool that can be used in preparing for a secure retirement. Like all other annuities, they can help you obtain a guaranteed, life-long income stream. However, unlike other annuities, the growth of the funds in an FIA leverages the Power of Indexing, allowing those dollars to grow with the stock market while 100% shielded from all market losses.
In addition to granting access to the indexing strategy, FIAs offer other advantages to enhance and protect to your retirement savings.
The Other Advantages of a FIA
The FIA differs from many other financial vehicles (including other annuities) by its ability to harness Power of Indexing; however, there are other features of FIAs that can help bolster and complement your retirement portfolio.
Guaranteed Lifetime Income
This is a feature that you can obtain with any annuity, not specifically the FIA. You can decide to "annuitize" your annuity at some point in time after creating your account (even immediately afterwards), making an agreement with your life insurance/annuity company that you will be receiving a certain amount of dollars every month or year for the rest of your life based upon your account balance at the time and your age. The older you are and the more money you have in your annuity at the time, the higher that income will be. This can actually be a very powerful tool in retirement in terms of having security that you will be consistently receiving a known amount of income for the remainder of your life.
There is a significant caveat to annuitizing any annuity; this decision is permanent and irrevocable. Your account cannot go back to being a regular annuity thereafter. However, certain types of FIAs, typically described as Income FIAs (IFIA), offer a Lifetime Income Rider (LIR). These riders allow your account to generate guaranteed lifetime income with the option to turn off that income in the future if desired. The LIR would also allow you to start a new stream of guaranteed income from the account again, but the amount of that income would have to be re-calculated.
Retirement Account Rollover
As it pertains to retirement savings, a rollover is when you transfer money from a traditional retirement account (sometime called qualified accounts), like a 401(k), 403(b) or IRA, to another one of these same accounts. For example, you can rollover funds from a 401(k) at a previous employer to an IRA, or rollover your savings from a 403b at an old job to the 401(k) with your current one.
FIAs and other annuities offer IRAs within the account, allowing you to rollover funds from other retirement accounts. One of the primary benefits of transferring these funds to an FIA is protection from market volatility. Since FIAs employ the Power of Indexing, any funds rolled over into an FIA can enjoy the same benefit. Once transferred, these dollars would be completely protected from future stock market downturns while still being able to capture market growth.
Enhanced Growth of Funds
Another type of FIA is the Growth FIA (GFIA). Unlike the IFIA, which focuses on establishing steady income in retirement, the main purpose of a GFIA is to help maximize growth within the account.
To this end, GFIAs give you the option to pay a small fee (i.e. 1-2% per year) to multiply the growth captured using the indexing strategy. As 2023, some FIAs may actually offer to multiply the index growth by 200% to 300%, but when the optional fee is applied, the growth can be multiplied by 300% to over 400%. For example, if you paid the fee for an indexing strategy offering 350% growth and the corresponding index increased in value by 10%, any funds applied to that particular strategy would actually increase by 35%.
This option to enhance the growth of your funds can be applied to any funds that are rolled over into a GFIA from another retirement account, which would then give these funds the ability to grow at a much higher rate than before while simultaneously benefitting from protection from market loss.
Tax Advantages
Whether you have an FIA or any other annuity, the growth within the account occurs on a tax-deferred basis, just like traditional retirement accounts. This means that the growth captured via the indexed strategy is not taxed from year to year, letting compound interest work for you without resistance.
However, unlike an Indexed Universal Life insurance policy (or IUL), the funds distributed from an FIA are not all inherently tax-free dollars. For FIAs funded without a rollover, the actual dollars you contribute can be received tax-free, but any growth from those contributions are taxable. In addition, when you decide to access those funds, you have to receive them out Last In, First Out (or LIFO) per IRS rules, and the dollars generated from the growth of your contributions are considered to be "last in". This means you would have to withdraw an amount equivalent to all of the cumulative growth the account has realized since it was opened before the remaining dollars could be taken tax-free.
If the FIA was funded by a rollover from a 401(k), 403(b) or IRA, all savings accessed in retirement would remain taxable as they were prior to the rollover per IRS rules. However, if a Roth 401(k) or Roth IRA was rolled over into an FIA, or if any dollars previously rolled over from traditional retirement accounts were converted to Roth dollars (by paying taxes prior to retirement), you could access all of those dollars tax-free in retirement, adding protection from the risk of outliving your savings.
To learn more about the benefits of the FIA, watch the following video:
If you would like to see how an FIA (IFIA, GFIA or both) can work specifically for you, click below to schedule a free consultation with us. It would be our pleasure to serve you in your journey towards financial security and peace of mind.
**The information provided on this website does not constitute financial advice. Consult with a qualified financial advisor before making any financial decisions based on the information provided here.