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Better Retirement Planning: Is an Indexed Annuity Right for You?

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Indexed Annuity Rates in 2022

There are many ways to prepare for retirement, including employer-sponsored retirement plans, IRAs, and indexed annuities. But what is an indexed annuity, and how does it work?

Indexed annuities, also called equity-indexed or fixed-indexed annuities, are financial contracts with insurance companies. These contracts allow investors to earn interest based on the market index's performance. As a result, these annuities can yield high returns – but there are some downsides, too.

Pros of an indexed annuity:

  • Indexed annuities allow for the potential of higher interest rates with downside protection.
  • Contract values are not affected if market indices fall.
  • Indexed annuities are tax-deferred, which allows for tax strategy planning
  • Most offer the availability of Guaranteed Minimum Income Benefit Rider (GMIB) for future income needs.
  •  May be written as a single owner/ annuitant or joint owner/ annuitant

Downsides of an indexed annuity:

  • The insurance company sets and limits participation rates, caps, spreads, and has specific rules, restrictions, and expenses, affecting the investment return.
  • Complicated to track performance between annual statements and/ or Index anniversaries.
  • Indices available are determined by the issuing insurance company
  • It is possible to lose money in this type of investment if withdrawals exceed annual allowable amount during surrender period.
  • Withdrawals before age 59½ may be subject to a 10% federal income tax penalty.
  • Interest, though tax deferred, is taxed as ordinary income when withdrawn from the annuity.

Understanding indexed annuities can be confusing. Contact the Horizon Trust & Investments team to help you determine if an indexed annuity is best for your personal situation and retirement savings. Call (219) 873-2683. 

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