annuities Fixed indexed annuities (FIAs) have become very popular investments in the last several years for investors seeking steady retirement income. But be aware that they are complex, and can vary in quality and security. Before considering these investments, you should consult with your financial advisor. Below are some guidelines to help you better understand fixed income annuities.

How do FIAs work?
A fixed indexed annuity is a form of a fixed annuity contract tied to a stock index that provides the opportunity to earn returns better than those in a traditional fixed annuity, but less than those of a direct investment in the market itself. The insurance company invests in a mix of bonds and stock options designed to give a targeted participation rate on the return of a particular index. You are able to participate to a degree in stock market gains during a rising market. If stocks fall, then the contract guarantees a minimum return, typically 3%. Therefore, the FIA has less downward volatility than a variable annuity. However, the FIA will also limit the maximum returns of a rising market as compensation. Most FIAs use a “participation rate” to limit returns. For instance, the insurance company may declare a participation rate of 90% (some companies are as low as 50%), which means the annuity would be credited with only 90% of the gain experienced by the equity index for that year. If the index gained 10%, then the gain in the annuity would be 9% for the year. Most will also tie FIA returns to those deriving from market price changes only, and exclude any return due to the payment of dividends.

What are the benefits?
Some of the benefits of a FIA include:
• Safety: Backed by highly rated, state regulated insurance companies
• Tax Deferral: Tax-deferred growth
• Participation in a portion of stock market gains with no risk of loss
• Life Insurance: Death payout guarantee options
• Liquidity: Flexible withdrawal privileges
• Unlimited Contributions, unlike IRAs and 401(k)s
• Inheritance: Pass money directly to heirs bypassing probate
• Lifetime Option: Income you can’t outlive

What are the risks?
Some of the disadvantages of FIAs include:
• 10% IRS penalty on withdrawals prior to 59 1/2 years of ag e
• Early withdrawal penalties or surrender charges
• Ordinary income tax owed on earnings during the withdrawal
• LIFO: Last in first out tax requirement so earnings are taxed first
• Fixed index annuities are not FDIC insured
• Fixed index annuities do not capture the full upside of the stock market
• It is possible during a down year or years to have zero-interest crediting