by clicking on the page. A slider will appear, allowing you to adjust your zoom level. Return to the original size by clicking on the page again.
the page around when zoomed in by dragging it.
the zoom using the slider on the top right.
by clicking on the zoomed-in page.
by entering text in the search field and click on "In This Issue" or "All Issues" to search the current issue or the archive of back issues respectively.
by clicking on thumbnails to select pages, and then press the print button.
this publication and page.
displays a table of sections with thumbnails and descriptions.
displays thumbnails of every page in the issue. Click on a page to jump.
allows you to browse through every available issue.
Federal Employees News Digest : Oct 21, 2013
With more "baby boomers" concerned about having a sufficient amount of income to last throughout retirement retiring each year, the insur- ance industry is flooding the mailboxes of individuals approaching retirement with advertisements about buying a guaranteed future income stream in the form of an annuity. This first of two columns discussing annuities explains what an annuity is and examines the costs associated with annuity ownership. An annuity is a financial product, sold by a finan- cial institution, that is designed to invest an individu- al's contributed funds, and then at the time of "annui- tization" pay out a guaranteed stream of payments to the individual investor either immediately---an "immediate" annuity---or later---a "deferred" annu- ity. The individual investor---or "annuity owner"--- transfers funds to the financial institution either in a lump sum or in installments over time. The financial institution, hereafter called the "annuity compa- ny," could be an insurance company, a brokerage firm, or an "open end" company (mutual fund). For this discussion, it is assumed that the money used to fund the annuity has already been taxed. This type of annuity is called a "nonqualified" annuity, and will be the type examined throughout this discussion on annuities. Nonqualified annuities include "fixed," "variable," and "longevity" annuities, which will be discussed in next week's column. Costs Associated with Annuity Ownership There are four main costs associated with annuity ownership: (1) disclosed costs, (2) built-in costs, (3) opportunity costs and (4) tax costs. • Disclosed costs. With an annuity prospectus (for a variable annuity) or a statement of understanding (for a fixed annuity), an annuity company must list and explain the specific costs of owning the annuity. The selling annuity agent or broker is responsible for explaining these costs, how these costs are applied to the annuity contract, and how the annuity is affected when funds are with- drawn. Riders, which are additional benefits that can be added to an annuity contract, may also have disclosed costs. An example of a rider is for an annual cost-of-living adjustment. • Built-In Costs. Most built-in or "hidden" costs are associated with variable annuities. These costs include annuity commissions and surrender charges that are associated with deferred annuities. Deferred annuities typically come with a surrender charge period and corresponding surrender charges in which a charge will apply if the annuity owner withdraws funds before the end of the sur- render charge period. • Opportunity cost. This is a cost that most annu- ity agents or brokers rarely discuss but should be addressed and fully understood before an annuity is purchased. Since annuities are a transfer of risk for a contractual guaranteed goal or purpose, the annuity owner must understand that by transferring a set amount of money to the annuity company, the allo- cated annuity money may possibly lose out on other more positive investment opportunities outside of the annuity structure. This cost of possible "loss" on other investment opportunities is referred to as "opportunity cost." • Tax costs. Before buying an annuity, the buyer should check with a qualified tax professional regarding the tax issues associated with annuity ownership. For all annuities purchased after 1982, "last in/first out" (LIFO) taxation applies to money taken out of an annuity contract; that is, any investment gains will be taxed first and at ordinary income tax levels. With an "annui- tized income stream," the income is a combination of return of (after-tax) principal and (before-tax) earnings. For income stream in a nonqualified account, annuity withdrawals are subject to an "exclusion ratio." The exclusion ratio is important to understand since a portion of an annuity withdrawal is a return of principal which is not subject to tax. The IRS penalty for taking money out of nonqualified annuities before the annuity owner is age 59.5 is 10 percent. This is unless the IRS's "72(t)" rule applies, as can be explained by a qualified tax professional. Some additional considerations before purchasing an annuity: • Current low-interest rate environment. The interest percent- age paid on the initial amount invested in a fixed annuity is based on market rates at the time of purchase and remains that percent- age amount throughout the life of a fixed annuity. If the initial interest rate is low, then the result is less total interest income paid during the annuity's term compared to an annuity purchased at a time of higher market interest rates. • Annuity company safety. Annuity guarantees are only as good as the issuing annuity company guaranteeing them. Therefore it is important for an annuity purchaser to research the safety and stability of the annuity carrier. Annuities are rated by Standard and Poor's, Moody's, Fitch and A.M Best. These companies rate annuities and assign a score from 1 to 100, with 100 being the top score. Annuities are also regulated at the state level but not the federal level. Each state has a guarantee fund that backs annuity contracts to a specific level. Each state's guarantee levels can be viewed at www.nolhga.com (National Organization of Life and Health Insurance Guarantee Associations). Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor What to consider before buying an annuity: Part I October 21, 2013 Vol. 63, No. 14 8 Visit us on the Internet at www.FederalDaily.com
Oct 14, 2013
Oct 28, 2013