It was only a few years ago that interest rates plunged to historic lows. Conservative investors who needed guaranteed income and preservation of principal were in a bind. In many situations, returns at the bank were below two percent and fixed annuity accounts yielded only marginally better. Many of these careful investors purchased fixed annuities instead of bank instruments in order to capture higher returns.
How times have changed. The United States economy improved considerably. Inflation pressure grew, and the Federal save began to ratchet up interest rates while treasury yields increased in kind. While much of this was good news, it produced problems for the annuity purchaser from just a few years ago.
Concerns with Older Annuity Accounts
If you invested in a traditional fixed annuity account during these low yielding years, you may find yourself in a dilemma. The problem: many of these accounts have fallen to their guaranteed minimum yields. Currently, they might only offer a paltry return between 2 and 3.5 percent. There are several reasons for this decline. To begin with, many annuity accounts have a first year bonus that will not be paid in later years. In addition, these accounts often provide a floating rate of return. Their returns are not locked in. A floating rate annuity is quick to go down in years where yields are decreasing, but slow to come back up when yields in the treasury market increase. basically, if you purchased an annuity in the lean years, you may have locked in poor yields for the duration of your account.
There are other issues in addition. If your annuity has not reached maturity, you will have to pay surrender penalties if you cash in the account early. In addition, if you purchased a non-qualified annuity account, you may have accumulated tax deferred interest. Should you move your annuity to anything another than another annuity account, you could have income tax to pay. Taxes and penalties will quickly lower your account value upon early surrender.
How to enhance Your Fixed Annuity Returns
Rest assured this is not a story of doom and gloom. The fix to this problem is simple. You simply exchange your old annuity for a new account. Rates have increased dramatically over the last three years, and newer annuities can lock in much higher yields. Furthermore, it may be a wise decision to lock in rates with a guaranteed fixed provide as oppose to a floating rate of return.
Unless your account is very new, the higher guaranteed yields can more than make up for any surrender penalties your may have. A large account can build up thousands of additional dollars by making this change. (It is important to observe that many economic pundits are already predicting that the Federal save Board will begin to lower rates. This will most certainly force treasury markets and annuity yields lower for those who have not locked in higher rates.)
Income Taxes on Tax Deferred Interest 1035 Exchange
Additionally, if income taxes are a concern, you should understand that taxes are not due if you move your old non-qualified annuity to a new annuity account. This is why owners simply move from one annuity to another in what the I.R.S. has deemed a 1035 tax-free exchange. Income taxes will only be due if and when you decide to take out your interest. If yours is a retirement account (also called a qualified account) you can simply perform a rollover. If done properly, (with the help of an experienced agent and/or accountant), a qualified rollover is not a taxable event either.
In summary, no longer do you need to dread your quarterly annuity statements. There are several reputable insurance companies providing very reasonable guaranteed returns. These products will provide you with higher yields, potentially shorter durations, liquidity and peace of mind. An annuity rollover or 1035 exchange can be a wise investment choice.