Retirement AnnuityAn individual retirement annuity operates like a Traditional IRA. The basic difference is that individual retirement annuity requires buying an annuity account and thus purchasing a contract with an insurance company. An individual retirement annuity account provides life insurance protection. In general Retirement Annuities were the precursors for Individual Pension Plans. They operated before July 1988. At the moment they are no longer available as new investments, but if one already got one, the account might be very useful (especially of one is a high earner).
Key features of Retirement Annuity: -- All premiums are tax-deferred. -- If one didn't pay the maximum contribution during one year. He/she can catch up by going back up to 6 years. -- Employers cannot contribute. -- Cash is calculated as a function of annuity rates and is three times the annuity (in practice it is more than 25% offered by Individual Pension Plans). -- For those who have made up an account after March 17, 1987, there is a limit of money, but the problem can be solved by dividing the contract into several sections. -- One can start taking distributions from 60-75. The annuity contract can be either individual or group with separate accounts for each employee. The contributions are made under a tax-sheltered annuity contract with the insurance company. The company in return provides interest rate or variable rate of return. An individual retirement annuity contract is issued in the name of the owner. Only the owner or the owner's beneficiaries can get the money from the account. An individual retirement annuity contract must meet the following requirements: -- The interest in the annuity must be fully vested. -- The contract must feature the fact that the owner cannot transfer any portion of it to any other person except for insurance company itself. -- The contract must feature flexible premiums, i.e. if the compensation of the owner changes the payments must change as well. -- Early contributions cannot be bigger than $4 000 (which coincides wit ha traditional IRA). -- Any refunds of premiums can only be used to pay for future premiums or to buy more benefits before the end of the calendar year after the year the refund is received. -- The distributions from the account must be made by April 1 of the year following the year the owner reaches 70.5 Endowment Contracts All the endowment contracts issued before November 6 1978 are qualified as individual retirement annuities. It is important to know that no deduction is allowed for amounts paid under the contract that are allocable to life insurance. The cost of the current life insurance protection is the product of the net premium cost which is set by IRS multiplied the excess of the death benefit payable under the contract during the taxable year over the cash value of the contract at the end of the year. |