As a Real Estate investor you may have thought that owning and renting houses was your the only answer to creating an income stream. In today's economy many Real Estate professionals are replacing their rental properties to guaranteed investment options, such as fixed annuities. Those that seek higher interest rate returns are more likely interested in indexed or variable annuities.
Tax Deferred Annuities are an attractive alternative to dealing with tenants - toilets and taxes. If you have to have your hands in real estate, then consider diversifying your real estate portfolio and reinvesting in annuities.
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To better understand an annuity, consider that there are many categories of annuities. They can be classified by:
- Nature of the underlying investment - fixed or variable
- Primary purpose - accumulation or pay-out (deferred or immediate)
- Nature of pay-out commitment - fixed period, fixed amount, or lifetime
- Tax status - qualified or nonqualified
- Premium payment arrangement - single premium or flexible premium
- An annuity can be classified in several of these categories at once.
Consider these attractive features:
Tax deferral on investment earnings
Many investments are taxed year by year, but the investment earnings-capital gains and investment income-in annuities aren't taxable until you withdraw money. This tax deferral is also true of 401(k)s and IRAs; however, unlike these products, there are no limits on the amount you can put into an annuity. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs.
Protection from creditors
If you own an immediate annuity (that is, you are receiving money from an insurance company), generally the most that creditors can access is the payments as they're made, since the money you gave the insurance company now belongs to the company. Some state statutes and court decisions also protect some or all of the payments from those annuities. And your money in tax-favored retirement plans, such as IRAs and 401(k)s, are generally protected, whether invested in an annuity or not.
An array of investment options, including "floors"
Many annuity companies offer a variety of investment options. You can invest in a fixed annuity which would credit a specified interest rate, similar to a bank Certificate of Deposit (CD). If you buy a variable annuity, your money can be invested in stock or bond (or other) mutual funds. In recent years, annuity companies have created various types of "floors" that limit the extent of investment decline from an increasing reference point. For example, the annuity may offer a feature that guarantees your investment will never fall below its value on its most recent policy anniversary.
Tax-free transfers among investment options
In contrast to mutual funds and other investments made with "after-tax money," with annuities there are no tax consequences if you change how your funds are invested. This can be particularly valuable if you are using a strategy called "rebalancing," which is recommended by many financial advisors. Under rebalancing, you shift your investments periodically to return them to the proportions that you determine represent the risk/return combination most appropriate for your situation.
A lifetime immediate annuity converts an investment into a stream of payments that last as long as you do. In concept, the payments come from three "pockets": Your investment, investment earnings and money from a pool of people in your group who do not live as long as actuarial tables forecast. It's the pooling that's unique to annuities, and it's what enables annuity companies to be able to guarantee you a lifetime income.
Benefits to your heirs
There is a common misconception about annuities that if you start an immediate lifetime annuity and die soon after that, the insurance company keeps all of your investment in the annuity. To prevent it, buy a "guaranteed period" with the immediate annuity. A guaranteed period commits the insurance company to continue payments after you die to one or more beneficiaries you designate; the payments continue to the end of the stated guaranteed period-usually 10 or 20 years (measured from when you started receiving the annuity payments). Moreover, annuity benefits that pass to beneficiaries don't go through probate and aren't governed by your will.