Types of Annuities and How they Work

The other day I was craving tacos. The hunger was fierce. So, I decided to head to my favorite Mexican restaurant to satisfy my appetite.

Usually, I choose between either coconut shrimp or carnitas. But, on this particular day, I wanted to try something different. But, I quickly became overwhelmed by the possibilities.

Granted, this was a Chiptole situation where I could apparently have some 655,360 combinations to pick from.But, stilll, the decision wasn’t easy. And, while I was standing in line, I got to thinking. This is kinda similar to annuities.

That might seem like a stretch. But, it’s true. If you want to buy a taco, you have several different options based on your preferences and dietary needs. The same is true with annuities. There are different types that are designed to meet your specific retirement needs.

So, let’s explore what the different types of annuities are and how they work so that you can pick the best one.

The Main Types of Annuities

Generally speaking, there are two basic annuity types, immediate and deferred. The main difference between them is your payout options. With an immediate annuity, you’ll receive payments right away. A deferred annuity will have to wait until a future date to collect your money.

Here’s where things can get hairy. Within these basic categories there are three other types of annuities;

  • Fixed. As a result of the contract, you will receive a fixed amount based on an interest rate.
  • Variable. This is a tax-deferred annuity that allows you to invest finances into subaccounts.
  • Indexed. The return is based on the performance of a stock index, such as the S&P 500 Composite Stock Price Index.

Still, confused? No worries. Let’s further explain what these annuity types are and how they operate.


The least risky, most predictable, and straightforward annuity option available. With fixed annuities, the rate of interest is guaranteed and doesn’t change once the contract has been signed. For example, with a Due Fixed Annuity, you’ll receive 3% on every dollar deposited.

However, there are some fixed annuities that where the rate will rise and fall. Often, an interest rate reset occurs after a specified period of time.

In short, a mixed annuity performs like a certificate of deposit (CD). Like a CD, a fixed annuity offers principal protection. As such, it’s a low-risk investment. That does come at the expense of higher growth potential. Upon maturity, you can collect your funds at a guaranteed minimum rate.

However, that’s where the similarities end. In most cases, CDs are used for short-term goals, like putting down a down payment on a house. On the other hand, fixed annuities are long-term investments that you’ll wait and use when in retirement.

How does a fixed annuity work?

An insurance or annuity company sells you a fixed annuity. You have the option to pay this in installments or a lump sum payment. In return, you receive a certain interest rate that the company guarantees.

It’s during the accumulation phase where tax-deferred growth takes place. And, how much you’ll get is determined by the following factors;

  • Amount of the premium
  • The current interest rate
  • How old are you and how long do you expect to live
  • Your gender

Or, you could save yourself the trouble and just stick with a fixed annuity that’s transparent from the get-go. Hint: this would be Due and it’s 3% guaranteed interest rate.


As with a fixed annuity, a variable annuity is a contract between you and an insurance/annuity company. But, it also grows on a tax-deferred basis and provides a guaranteed retirement income stream. And, it can be purchased with either a single payment or a series of multiple payments.

The key difference? With a variable annuity, you choose from a wide range of investment options known as sub-accounts. As a consequence, this will vary the value of your annuity contract.

Unlike a fixed annuity, the value of your contract fluctuates. This is determined by how your investments are fairing. In most cases, your investment options are mutual funds comprised of stocks, bonds, and, and money market instruments. Often, this will be a combination of these investments.

That means that the potential growth is higher with a variable annuity than a fixed annuity. However, you could also lose money with a variable annuity making it a riskier option. You can attach riders, which you’ll you have to pay for, that can help protect you against market losses.

Because variable annuities hold unique benefits that aren’t available in other insurance products or investment options, they’re distinct. Just note that this uniqueness does come with a price in the form of expensive annuity fees.

How does a variable annuity work?

Purchasing a variable annuity does not mean that you’ll be in the dark regarding your available investment options. There are generally three types of mutual funds when you purchase a variable annuity; stock, bond, and money market. Additionally, you may be able to select other investments, such as stable income value mutual funds.

You don’t have to worry about the accumulation period if you choose an immediate variable annuity. This is because you’ll begin receiving payments as early as a year from buying the contract.

Deferred variable annuities do not follow the same rule though. There are two phases if you select this option, a phase of accumulation followed by a phase of payout. In short, this means you’ll get your money sometime down the road.


Also known as equity-indexed annuities or fixed-indexed annuities, index annuities combine the best features both of fixed and variable annuities. But, it also stands on its own by offering unique features. This includes providing a minimum guaranteed interest rate in addition to an interest rate that’s linked to a market index.

Annuities are generally based on well-known and broad indexes. Standard & Poor’s index of 500 stocks is the most popular. Some annuity contracts, however, are based on other indexes like the Nasdaq 100, the Russell 2000, and the Euro Stoxx 50.

In addition, some of these indices may represent certain market segments, while others may allow investors to pick multiple indexes. Moreover, you’ll have more risk, but less growth potential than you would with a fixed annuity thanks to the guaranteed interest rate. However, they’re not as risky or as high-yielding as variable annuities.

How does an indexed annuity work?

Owners of indexed annuities are more likely to earn higher returns than owners of other annuity types. It’s clear that indexed annuities only provide a better return than fixed annuities when the markets are performing well. Additionally, they do provide some level of protection against market declines making them less risky than variable annuities.

As with other annuity types, you promised a guaranteed income stream that grows tax-deferred. Also, you can fund an indexed annuity with one lump sum or recurring payments over time. But, you can decide when you want withdrawals to begin.

When you go to buy an indexed annuity contract, you’ll select an index, such as the S&P 500. The annuity company invests this money into that specific index. However, never put all of your eggs into one basket. As such, you should diversify your portfolio by placing your money into various indexes.

How is the rate on an indexed annuity is calculated? You select an index that reflects the change over the previous year. Alternatively, it may be based on a 12-month average gain. Overall, a specific index is used to index annuities.

There is a major concern with indexed annuities though. And, that’s that you may not receive the full benefits of index rises. The reason? There may be limits on potential gains. This is commonly known as the “participation rate.” If the participation rate is 100%, your account will be credited with all of the gains. The percentage may be as low as 25%, however. Usually, indexed annuities offer at least 80% to 90% participation rates.

Annuity Payout Options

In case you forget, annuities can be either immediate or deferred. What separates these two types is when you’ll begin receiving payments..

Immediate Annuity

An immediate annuity pays out payments within a year after it is purchased and is sometimes called an income annuity. An example of this might be winning the lottery or receiving an inheritance. Or, maybe you have a large sum of money stashed away.

Regardless, you purchase an immediate annuity with one payment. From there, you’ll receive guaranteed payments either for life or a specific timeframe. This is better suited for people approaching or already in retirement.

Why would people buy an immediate annuity? Well, it can prevent them from spending this large lump sum of cash. And, it’s also an effective way to supplement other retirement income, such as Social Security.

Deferred Annuity

With a deferred annuity, investors receive future payments. In most cases, this happens when an investor retires. During this time, the investment grows tax-deferred.

Deferred annuities are a better option for younger investors who have the time to let their savings accumulate. The downside? If you do need this money prior to age 59 ½, you’ll get slapped by a 10% IRS penalty fee.

How Long Are Annuities Paid?

Annuities generally provide longevity protection. That means annuities offer lifetime income that the owner can not outlive. But, there are a variety of options you can pick from.

Lifetime Annuities

These are guaranteed income streams during the annuitant’s lifetime. Some lifetime annuities do allow for beneficiaries to continue receiving payments after the annuitant dies. Annuity payments are based on the health and age of the annuitant.

Fixed-Period Annuities

An annuity with a fixed period, which is also called a term-certain annuity, is like winning a lottery prize. You can either take the cash amount now or receive payments that take place over a number of overs. Typically, payments are spread out over a 20- or 30-year period. A perk with this type of annuity is that it doesn’t take into account the age or health of the annuitant.

Are There Any Other Annuity Options?

To complicate matters even more, there are the following annuity options depending on if you have benfiaricies or not.

  • Annuities that pay only for the duration of the annuitant’s life are called life-only annuities. It’s possible to include provisions for your spouse or even a refund.
  • Period certain life annuities continue to pay even if the annuitant dies before the end of the period.
  • In the case of joint and survivorship annuities, the annuitant and a beneficiary both receive payments over their lives.

And, one more thing. Annuities can be either qualified or non-qualified.

“A qualified annuity is funded by pre-tax dollars,” states Deanna Ritchie in a previous Due article. “Contributions to a qualified annuity are dependent on your income. Therefore, you must also follow the required minimum distribution rules that are also applied to traditional 401(k)s and IRAs. This means that you must begin taking minimum distributions starting at the age of 70 ½.”

“With non-qualified annuities, you’re using after-tax dollars to fund the annuity,” adds Albert Costill in yet another Due piece. “That means you’ve already paid taxes on the money that you used to purchase it with.”

“Additionally, there are no required minimum distributions,” he says. “So, in a way, this is similar to how a Roth individual retirement account works. Unlike a Roth IRA, however, earnings that are withdrawn from non-qualified annuities are taxable at your regular tax rate.”

“And, the IRS doesn’t impose limitations on how much you can contribute to a non-qualified annuity annually. Just be aware that the insurance company that sold you the annuity may set an annual cap on contributions.”

Which Annuity Should You Buy?

Before committing to any annuity type, reflect on your specific goals and needs. You should also take stock of your risk level. And, you could also ask the following questions;

  • Is your goal long-term growth or a guaranteed income?
  • When are you planning to retire?
  • Do you have any other sources of income?
  • Do you have a plan for potential lifestyle changes and steady income loss?

For example, a fixed annuity might be your best bet if you hope for a reliable, lifetime income with low risk and costs attached. A variable annuity is worth exploring if you’re willing to take the risk of obtaining higher returns.

Additionally, you can add riders to customize the contract to suit your needs, such as long-term care insurance. As an example, leaving your loved ones a legacy. If so, consider adding a rider that permits you to designate beneficiaries.

Ultimately, you want to talk to a trusted finanical professional before buying any type of annuity. They can help you decide on which option is best for you and your financial future.

Best Annuity Rates to Help Your Money Grow Everyday

Annuity rates are the percentage your annuity grows each and every year. Whether you’re still in the planning stages or have just recently retired, you’re probably concerned about being able to cover your living, healthcare, and medical expenses. You’ve also probably had many sleepless nights worrying whether you’re going to outlive your savings or not. While all retirement concerns are valid, there might be a rare one-fix solution to put your mind at ease. And, it’s through an annuity. The key is finding the right annuity for you. Here are the best annuity rates on the market.

Annuities are insurance contracts. They provide a guaranteed lifetime income and protection against losing your initial investment. You may be able to use an annuity to assist you with your long-term costs too. And, you can leave the balance to heirs.

Unfortunately, many people aren’t taking advantage of annuities. Maybe it’s because they’re overwhelmed by them — or overwhelmed by all things about retirement. And, that’s a fair point. After all, annuities come in a variety of flavors — just like ice cream.

For starters, an annuity rates can be either immediate (begin paying out now) or deferred (being paying out at a later date). Additionally, they might fall into the following annuity types;

  • Fixed annuities promise to pay you a guaranteed interest on your contributions. Rates are often based on the current interest environment. Overall, a fixed annuity is the most straightforward and predictable. 
  • Fixed indexed income annuities also offer principal protection like a traditional fixed annuity. However, there is upside potential through index participation (such as S&P 500). Principal protection and growth.
  • Multi-year guaranteed annuities (MYGA) offer a fixed rate of return, but for a specified period of time.  
  • Variable annuities are tied to an investment portfolio. So, payments can increase when the market is performing well and decrease when it’s not. You can expect higher returns, but there’s more risk involved. 
  • Registered index-linked annuities are relatively new and are tied to the stock market index. Gains are capped and losses are limited.

What to look for when buying an annuity?

Are you feeling comfortable enough with annuities now that you want to buy one? If so, you’ll want to keep the following in mind so that you’ll get the most out of the annuity.

Pick the right type of annuity for you.

If you’re allergic to peanuts, then you should stay far away from peanut butter ice cream. It’s kind of the same thing with annuities. If you’re already in retirement, then a deferred variable annuity probably doesn’t make much sense. Select the annuity that best aligns with your retirement plan and doesn’t exceed your risk threshold. 

Check the annuity rates and terms.

Before committing to a contract, carefully review the rates and terms. It should be clearly stated when you can access your money, how much you’ll be receiving, and the fees associated with the annuity. For example, if you withdraw any money before you’re permitted, you’ll be subject to surrender charges. 

Choose your salesperson wisely.

Since your broker has to put food on the table, they’ll earn a commission from annuity sales. Often, these costs aren’t disclosed. Find out how much they’re making off the sale. And, more importantly, that they’re not selling the wrong annuity just to cash in on a commission. 

Select a financially strong insurance company.

Annuities aren’t backed by institutions like the FDIC. They’re also supposed to last you a lifetime. As such, you need to make sure that you’re working with an insurance company that’s in it for the long haul. You can make sure that they’ve received a high rating from third parties like A.M. Best, Moody’s, Standard & Poor’s (S&P), and/or Fitch, etc.

Some other considerations? How easy it is to sign up and fund the annuity, as well as access your money. Customer service and what you expect your payments to be should also be factored in. Also, look at the interest rates for payout.

But, since your time is valuable, we’ve gone ahead and listed the 25 best annuities that you should purchase. Each has met the criteria above. And, we’ve even broken the list down into the best fixed, fixed indexed growth, MYGA, variable, and registered index-linked annuities so that you can quickly find the right type of annuity for you.

Top Annuity Rates

1. Due Fixed Annuity

Due Annuity

When it comes to fixed annuities, Due has quickly established itself as a market leader. Founded by entrepreneur serial and annuity expert John Rampton, the company has already secured over 12,000 registered users. Those who sign up for a Due account can anticipate a guaranteed annuity rate of 3% return. And, on average, users are receiving $2,100 in retirement income per month.

But what makes Due the nation’s top retirement app? Easy. It’s incredibly accessible and easy to understand.

Due was designed for the average person to finally grab a piece of that guaranteed income ice cream cake. As such, it’s one of the most straightforward and transparent annuities on the market. And, here’s how it works.

Just apply for a Due account. Don’t worry. It’s free and will take you under 10-minutes. Once you’re set-up, you’ll get 3% on every dollar deposited.

That’s it. No frills. No BS.

And, if you’re uncertain on how much you’ll need to save each month, there’s also a handy annuity calculator to determine this amount. And, all of your hard money is deposited into a Charles Schwab account. It’s then managed by Blackstone (NYSE: BX), and ATHOS Private Wealth. If you’re unaware, both have impeccable reputations as two of the best investment firms in the country.

2. American National Single Premium Immediate Annuity (SPIA)

American National Annuities Policy

Since 1905, American National has been providing insurance products and services, including annuities. The company has three annuity options; a fixed deferred annuity, index deferred annuity and an SPIA.

Because American National has an A rating from A.M. Best you can be certain that the company is financially strong and will be sticking around. That makes all of their offerings appealing. But, their SPIA is the superstar of the bunch.

With this annuity, you can convert a lump sum of money into a predictable income stream. In fact, a “joint life” option has an average annual income of $10,609 and an annual payout rate of 5.30% — but it changes with what the current percentages are at the time of payout. You can spread this income out over a number of years, making your taxes more manageable, and there are several cash-out options. That makes it easier to withdraw your money in case there’s an emergency — but as with all annuities, there are fees with early withdrawal.

3. CUNA Mutual Group MaxProtect Fixed Annuity

CUNA Mutual Group Annuities

Issued by the CMFG Life Insurance Company, the MaxProtect Fixed Annuity offers a guaranteed and competitive rate. That means you don’t have to sweat market volatility. But, at the same time, your annuity will grow faster than other taxable investments like CDs.

CUNA also gives you the option to lock in your interest rate for 3, 5 or 7 years. Afterward, you have several options to turn your savings into a series of income payments. And, there are no contract, administrative or upfront fees.

A.M. Best rated CUNA “A,” Standard & Poor’s (S&P) gave it an “A+” and Moody’s gave it an “A2.” That means you should have no concerns over CUNA’s financial future.

4. New York Life Secure Term Choice Fixed Annuity II

New York Life Annuities

In general, you can’t go wrong with any New York Life annuity. After all, the company has a long and rich history dating back to 1845. It also has an A++ from A.M. Best, and has been the top provider of fixed deferred annuities since 2010. The company has also received the highest score among individual annuity providers in customer service by J.D. Power.

But, we’ve selected the New York Life Secure Term Choice Fixed Annuity II as our favorite annuity offering from the company. It requires a $5,000 premium amount to begin, but there aren’t any annual charges. Annuity rates are subject to and depend on the length of the contract, but the Guaranteed Minimum Interest Rate (GMIR) is 0.05% (except in New York where it is 1%). And, you also have the option to go with a 3, 4, 5, 6, or 7-year policy.

5. American Equity GuaranteeShield

American Equity Annuity

Online reviews for American Equity have noted that American Equity delivers outstanding customer service. And, as far as financial strength goes, it’s earned an A- (Excellent) from A.M. Best. Furthermore, the company has several different annuity options.

For our money, though, we like the GuaranteeShield series. It checks all the boxes for a fixed annuity, including;

  • Principal protection
  • Guaranteed income
  • Tax-deferred growth
  • Liquidity
  • May avoid probate

You can also access up to 10% of your contract’s value each year and add on a market value adjustment and death benefit rider. Interest rates may vary each contract year. But, the GMIR will never drop below 1%.


Top Fixed Indexed Growth Annuities

6. AIG – Assured Edge Income Builder

AIG Index Annuities

With the Assured Edge Income Builder from AIG, you can reap the benefits of a fixed annuity. Additionally, your guaranteed lifetime income amount (GLIA) will increase based on a 7% income growth rate each year until you begin receiving payments. And, according to the company, the annual income credit is a dollar amount calculated by multiplying the initial GLIA by the 7% income growth rate.

But, there are a couple of other features that make this a highly coveted annuity. There’s also a market value adjustment and a flexible guaranteed withdrawal benefit (GLWB). For example, being able to take multiple withdrawals of up to 10% of your contract value as of the previous anniversary, with no withdrawal charge or market value adjustment (MVA).

You’ll need a $25,000 minimum deposit. And, you should also know that AIG has received an A from A.M. Best, A2 from Moody’s, A+ from S&P, and A+ from Fitch.

7. Nationwide – New Heights 9

Nationwide Fixed Annuities

Going back to 1926, Nationwide offers insurance, retirement, and annuity products. What makes Nationwide a top annuity company is that its products are flexible. For example, you can purchase a premium through a series of payments or just one lump sum.

In particular, the company’s New Heights 9 Fixed Indexed Annuity deserves a shoutout. As stated on the company’s site, “New Heights 9 tracks your potential strategy earnings also known as earnings, daily, and does not limit the amount of index performance used to calculate your earnings.” You also might be able to snag higher long-term accumulation depending on the performance of the underlying index and declared percentage or rate component.

Additionally, your money is protected from potential market risk. And, you can also tack on optional riders. One such rider worth considering is guaranteeing a lifetime income for you, your spouse, or heirs.

Additionally, Nationwide has landed high financial ratings. A.M. Best rated it an A+ (Superior), S&P gave it an A+ (Extremely Strong), and Moody’s rated it an A1 (Upper-Medium Grade).

8. Protective Indexed Annuity II

Protective Life Annuity Product

Protective has been in business since 1907. And, throughout the years they’ve garnered an A+ rating from A.M. Best, AA- from S&P, A1 from Moody’s, and A+ from Fitch. They also just so happen to be one of the top-selling registered-index-linked companies.

With that in mind, we would be remiss if we didn’t mention its Indexed Annuity II. The company promises protection on your principal, a lifetime stream of guaranteed income, and potential for higher growth based on the performance of the S&P 500 Index. One of the most appealing features, however, is that you’re able to access your money penalty-free if you become unemployed, terminally ill, or have to relocate to a nursing facility.

There’s a $10,000 minimum. But, you don’t have to be concerned with an annual contract fee.

9. Global Atlantic ForeIncome II

Global Atlantic Retirement Annuities

Global Atlantic offers several different annuity products including a fixed, variable, income, or fixed index annuity. And, it’s the latter that we want to focus on.

It turns out the Global Atlantic has five different fixed index annuities, FIAs for short. The purpose of these is that you’ll have greater growth potential than traditional deposit products, tax-deferred growth, and no market losses. Also, you can pass the balance on to your beneficiaries.

Specifically, the ForeIncome II stands out the most. It aims to provide you with a “retirement paycheck” for life. And, this is an extra income that you can’t outlive. What’s more, you have two withdrawal options;

  • The Guaranteed Income Builder Benefit offers a steady, predictable income for your entire life. 
  • The Income Multiplier Benefit provides a steady income, but it grows by being tied to the S&P 500.

And, there’s no need to stress over Global Atlantic’s financial strength. The company has earned an A from A.M. Best, Fitch, and Moody’s, along with an A- from Standard & Poor’s.

10. Lincoln Financial OptiBlend

Lincoln Financial Group Protected Annuity

Lincoln Financial has been in existence since 1905. The company offers a wide range of products including annuities, life insurance, retirement plan services, and group protection. But, obviously, we want to highlight the company’s annuities — specifically the Lincoln OptiBlend.

This is a fixed indexed annuity. It has flexible premium annuities and offers a set interest rate for one year. Interest rates are declared annually. Another key feature includes a 5-year, 7-year or 10-year surrender charge schedule.

But, the standout is that your portfolio is tied to the performance of four different indexed accounts; the 1 Year Fidelity AIM Dividend Participation, 1 Year S&P 500 5% Daily Risk Control Spread, 1 Year S&P 500 Cap, and 1 Year S&P 500 Participation.

There’s a $10,000 minimum. But, no annual contract fees.


Top Multi-year Guaranteed Annuities

Before we can go any further, you must know that these rates change frequently. As such, the rates we’re including here are from June 2021. To check the most up-to-date rates, visit a source like Blueprint Income or the Annuity Guys.

11. Sentinel Security Life


Sentinel Security Life Annuity

This Utah-based business has been in operation since 1948. And, like insurers, they offer multiple annuity products including a fixed indexed and income annuity. However, the company offers some of the highest MYGAs annuity rates on the market.

Case in point, if you purchase a 10-year term, you’ll receive up to 3.20%. You’ll most likely need a $2,500 minimum initial premium — if you opt for Sentinel Security Life’s Personal Choice annuity. And, there aren’t any contract fees. We’re also like that if you become terminally ill or nursing home care withdrawal charges are waived.

What about Sentinel’s financial strength? A.M. Best ranked the firm at a B++ (Good). If you’re curious, this rating comes in eighth on A.M. Best’s scale of 21 possible grades.

12. Atlantic Coast Life Insurance


Atlantic Coast Life Insurance Annuity

Founded in 1925, Atlantic Coast Life Insurance is based out of Charleston, SC. While the company may not be a household name, it also offers favorable MYGA rates. One of its best is its 20-year term annuity that will fetch up to 3.30%.

Just for comparison’s sake, CDs offered online are paying 3% or less on a five-year paper. And, CDs available at bank branches are substantially less than this. So, we’ll take that 3.30%.

If you’re wary about Atlantic Coast Life Insurance it was rated a healthy B++ by A.M. Best. And, you may even land a first-year bonus of an additional one percentage point.

13. Canvas Annuity Future Fund

Canvas Annuity

Canvas is built around being a people-first annuity company. It promises great rates, flexible access, and absolutely zero commissions. In short, the company states that its revolutionizing annuities.

Considering that Canvas has a guaranteed crediting rate for the following term, 7 years and it’s annuity rates are up to 3.25%, you can’t argue with that sentiment. Moreover, you have 24/7 access to your information online and it’s available for anyone aged 18-90 years old. You’ll just need a $2,500 minimum initial premium.

The Scottsdale, AZ company has a B++ rating from A.M. Best. And, its annuities are issued by Puritan Life Insurance Company of America.

14. Oceanview Life Harbourview MYGAs

Harbourview Annuity

A.M. Best has rated Oceanview an “A-”. Which means the company has a stable outlook. What’s more, the company had multiple interest guarantee periods — 3, 4, 5, 6, 7 & 10 Years. But, what’s interesting is that the issue age is 0 through 89.

But, the company also has competitive rates, such as its 10-year term and annuity rate up to 3.10%. You’ll need a $20,000 premium requirement and there is a market value adjustment. And, the company also offers 10% free withdrawals.

15. Nassau Simple Annuity

Nassau Annuity

Based in Hartford, CT, Nassau Financial Group covers insurance, reinsurance, distribution and asset management. However, you probably can’t go wrong with its 6-year term where you’ll earn up to 3.10%.

Overall, this is a single-premium, multi-year guaranteed annuity that offers protection from market volatility. The premium range is between $5,000 – $1,00,000. Also, the issue age is 18-85.

The company’s financial strength is solid as it has received a B+ from A.M. Best.

Top Variable Annuities

16. Fidelity Personal Retirement Annuity

Fidelity Annuities Solution

Fidelity offers six quality annuities. And, it’s this variety, along with the company’s reputation for delivering stellar customer service, that makes it stand out. But, we’re fans of the Fidelity Personal Retirement Annuity.

Considered a top variable annuity by Barron’s this is a low-cost, tax-deferred annuity that gives you three different investment approaches, as described by the company;

  • A hands-off approach might be a fit if you don’t want to actively manage your portfolio and prefer to choose one single fund where Fidelity provides automatic diversification and professional money management.
  • A hands-on approach might be a fit if you want to manage your own investments. You’ll be able to utilize our powerful research tools to choose from more than 55 Fidelity and non-Fidelity funds, many rated 4 or 5 stars by Morningstar.
  • A sector investing approach might be a fit if you are interested in managing your own investments while focusing on 11 funds that each represent a specific segment of the economy.

A minimum investment of $10,000 is required. But, the annual annuity fees are some of the lowest in the industry — 0.25% for contracts purchased with an initial investment of less than $1 million.

17. Jackson National Life Perspective II

Jackson National Life Fixed Annuity

Even though Jackson National Life is a subsidiary of the British insurer, Prudential plc., its origins go back to 1961 in Jackson, Michigan. Over the years, the company has earned a solid reputation for its financial strength. In fact, Jackson National Life Insurance has received an A (Excellent) rating from AM Best.

The company offers fixed fixed index, and variable annuities. And, it’s its variable annuities that we want to shine a spotlight on. In particular, it’s the Perspective II contract.

It requires a minimum initial premium of $5,000 and has a $35 annual contract charge. You should also expect additional fees like a 1.30% core contract charge and 0.53% – 2.41% annual portfolio operating expenses.

Despite these fees, this annuity is designed for long-term investors with a timeframe of seven or more years. Most appealing is that you can attach the LifeGuard Freedom Flex. In a nutshell, this is Jackson’s version of the income rider benefit with an annual bonus guarantee of 7%. There’s also the opportunity to leave a legacy. And, you can view data for each of its variable annuity products through a partnership with Morningstar.

Finally, Jackson National Life is financially strong as it received an A (Excellent) rating from AM Best.

18. Transamerica Life Principium IV

Transamerica Life Annuity

Transamerica is one of the industry’s leading firms. The company has been around since 1928 and shows no signs of slowing down. After all, it’s securely landed within the top quarter of the A.M. Best, Moody’s, S&P Global, and Fitch scoring structures.

While the company does offer a variety of annuities, we’re partial to Principium IV. Fun fact. The word Principium comes from Latin to signify origin or root. The word itself, however, means principle — especially a basic one.

Overall, this is a lower-cost variable annuity containing a­ five-year surrender charge schedule. Other key features include automatic asset rebalancing, free transfers between subaccounts, and the ability for annuitization after the third policy anniversary. There’s also a dollar-cost averaging feature that will purchase more units when prices are low and fewer when prices are high.

A minimum initial premium of $1,000 is required if qualified and $5,000 for unqualified. There’s also a $35 annual service charge.

19. MassMutual Transitions Select II

MassMutual Annuities

MassMutual is known for providing a plethora of investment options for its variable annuity owners. And, each offering has varying philosophies and risk tolerance levels. As such, you might be able to find a product that fits you like a tailored suit.

If you want investment to be at the core of your variable annuity, then your best option is the Transitions Select II  product. You can choose sub accounts that are managed by some of the industry’s heaviest hitters including Oppenheimer Funds, Fidelity, Black Rock, and Franklin Templeton Investments.

There are also flexible payment arrangements after five years and free withdrawals that are up to 10% of purchase payments. You can also sign-up for MassMutual’s free automatic investment plan (AIP) and automatic rebalancing program.

An initial investment of $3,000 (qualified), $5,000 (non-qualified), is required. There’s also a $40 annual contract maintenance fee. And, if you’re curious about its financial ratings, here’s what MassMutual has received:

  • Fitch: AA+ (the second-highest of 21 grades)
  • A.M. Best: A++ (the highest category of 15)
  • Moody’s: Aa3 (fourth-highest of 21)
  • Standard & Poor’s ranks it at an AA+ (second-highest of 21)

20. Brighthouse Financial Variable Annuities with FlexChoice Access

Brighthouse Financial Annuities Provider

A variable annuity from Brighthouse, which has received an A rating from A.M. Best and Fitch, as well as an A+ from Standard & Poor’s, has the standard features you’d want. These include a guaranteed lifetime income and flexible investment options based on your personalized investment strategy. You can also set it up so that your spouse will continue to receive your payments.

But, it’s the FlexChoice option that makes this annuity worthy of inclusion. For starters, you’ll receive 5% annual compounding for the first 10 years of your contract. There’s also the ability to automatically lock in market gains and take either 6% or 4.75% withdrawals at age 65.

There’s a $10,000 minimum initial premium and a $30 annual contract fee. You should also expect additional fees, such as a 0.53% – 1.67% fund expense fee and 1.30% mortality/ expense/administration charge.


Top Registered Indexed Annuities

21. Athene Amplify

Athene Annuity & Life Company

Like a Phoenix emerging from a financial crisis, since launching in 2009, Athene has quickly become an annuity market leader. In particular, its Amplify product is a shining star.

This is a 6-year registered index-linked annuity that allows you to pursue growth opportunities so that you’ll get the most out of your annuity without taking on too much risk. There’s also a lot of flexibility with this annuity. For starters, Amplify offers 1, 2 and 6-year term periods. There’s also 4 different index options. And, you can also leave a legacy.

In regards to its financial strength, Athene has scored an “A” from A.M. Best, Fitch, and S&P.

22. Equitable Structured Capital Strategies

Equitable Annuity

Equitable Holdings Inc. was founded back in 1859. And, because of its financial strength, you can be confident that the company will be around for the foreseeable future. It has received an A from A.M. Best, A2 from Moody’s, and A+ from Standard & Poor’s.

As for annuities, we can get behind its Structured Capital Strategies variable annuity. Mainly because, as stated on its website, it “adapts to your unique investment styles so you can work toward your individual retirement goals on your terms.”

Specifically, this annuity provides the following;

  • Levels of downside protection that are up to -30%
  • Participation in indices, like the S&P 500 and Russell 2000, with the ability to up to a set performance cap rate, while also limiting your potential loss
  • Customization, such as the maturity date (1, 3, or 5 years), how much you’re willing to risk, and the index you’d like to base the performance of your investment

You’ll need $25,000 to get started. And, there will be fees like a 1.65% variable investment option fee and 0.58% – 0.71% annual portfolio operating expenses.

23. Allianz Index Advantage

Allianz Life of North America Fixed Annuity

This is the company’s core index variable annuity. It’s “designed to help you accumulate money for retirement and provide income after you retire,” Allianz states on its website. “It can give you long-term growth potential through market participation – plus a level of protection – through a combination of traditional variable options and multiple index strategies.”

However, this annuity really shines because you can subscribe to a specific type of index strategy through the company. That’s a stark contrast to other annuities where the portfolio is constructed with securities, indexes, and investment strategies.

Note that there are two separate annual fees associated with the Allianz Index Advantage Variable Annuity. The first is a 1.25% product fee, as well as a 0.64% to 0.72% variable option fee. But, if you annex the optional death benefit plan for an additional 0.20% fee will join it.

Also, don’t forget about the $10,000 minimum initial premium. And, if you’re a curious cat, Allianz has a solid A+ AM Best Rating.

24. Nationwide Monument Advisor

Nationwide, and its superior A+ rating from A.M. Best, offers the industry’s first flat fee, Investment Only Variable Annuity (IOVA). As such, there’s a low-cost $20 per month flat fee. How far will that get you? Well, this annuity has over 350 investment options — which is the largest in the industry.

As such, this annuity is ideal if you’re looking for a low-cost option and/or investment diversification. In fact, it’s these two features that make the Nationwide Monument Advisor so engaging.

Just take note that you may have to pay other fees as well. For example, additional fund platform fees can range from 10% to 35%. So, if you’re not careful, this low-cost, tax-deferred annuity could become rather expensive. And, a $15,000 minimum deposit is also needed.

25. Prudential FlexGuard Indexed Variable Annuity

Prudential Annuities

And, finally, we have the FlexGuard Indexed Variable Annuity from Prudential. This Fortune 500 company, which has an A+ from A.M. Best, states that this annuity can simplify your retirement planning while avoiding exposure to markets. It can also produce a reliable, “pension-like” guaranteed income stream.

FlexGuard also allows you to choose your buffer level as well as your term length and to allocate your money. This will be through well-known indices like S& P 500, iShares Russell 2000 ETF, Invesco QQQ ETF, and MSCI EAFE. And, perhaps most tempting, is that you can also select your own growth opportunity based on three different index returns; Point-to-Point with Cap Rate index, Tiered Participation Rate index strategy, or Step-Rate Plus.

You’re permitted to withdraw up to 10% of all purchase payments each year without incurring any surrender charges — just as long as the withdrawal is made within the surrender charge period. Other contract charges include Mortality, Expense, and Administration charges of 1.30% (M&E&A). These apply only when you allocate money to variable sub-accounts. And, a minimum purchase payment of $25,000 is required.


Here’s a summary of the best annuity rates of 2021

Annuity Name Type of Annuity Deferred or Immediate? Key Feature Minimum Initial Premium Guaranteed Rate of Return Contract Term Withdraw? Annual Fees A.M. Best Rating
Due Fixed Annuity Fixed Both Accessibility. Anyone can apply in under 10 minutes. $0.00 3.00% Withdraw at anytime, Free – up to 10% of contract value $10/month
American National Single Premium Immediate Annuity (SPIA) Fixed Immediate Flexibility, like multiple income payment options. $0.00 5.30% Partial None A
CUNA Mutual Group MaxProtect Fixed Annuity Fixed Both A market value adjustment and book value version $10,000.00 3, 5, or 7 years Free for health hardship None A
New York Life Secure Term Choice Fixed Annuity II Fixed Deferred A market value adjustment that could boost your finances $5,000.00 0.05% 3, 4, 5, 6, or 7 years Free – up to 10% of contract value None A++
American Equity GuaranteeShield Fixed Deferred Principal protection and guaranteed lifetime income $10,000.00 Never below 1% 5, 6, or 7 years Free – up to 10% of contract value None A-
AIG – Assured Edge Income Builder Fixed Indexed Growth Both You can decide when payments will begin $25,000.00 7.00% 7 years Multiple – up to 10% None A
Nationwide New Heights 9 Fixed Indexed Growth Deferred Principal protection with higher long-term accumulation $25,000.00 2%-5% 9 years Free – 7% of the contract’s value on the first day of the contract year None A+
Protective Indexed Annuity II Fixed Indexed Growth Deferred Can access money penalty-free if unemployed, terminally ill, or have to relocate to a nursing facility $10,000.00 1.20% – 1.55% 5 or 7 years See “Key Feature? None A+
Global Atlantic ForeIncome II Fixed Indexed Growth Deferred Guaranteed Income Builder Benefit offers a steady, predictable income for your entire life. $25,000.00 Linked to S&P 5, 7, or 10 years Free – up to 10% of contract value after 6 years None A
Lincoln Financial OptiBlend Fixed Indexed Growth Deferred Performance of portfolio is tied to the performance of four different indexed accounts $10,000.00 1.90% on premium amounts of $100,000 – $2,000,000 5, 7, or 10 years Free – up to 10% of contract value None A+
Sentinel Security Life Multi-year Guaranteed Deferred If you become terminally ill or nursing home care withdrawal charges are waived. $2,500.00 3.20% 10 years   None B++
Atlantic Coast Life Insurance Multi-year Guaranteed Deferred A favorable rate that’s higher then financial products like CDs. $2,500.00 3.30% 10 years   None B++
Canvas Annuity Future Fund Multi-year Guaranteed Deferred Accessibility. Anyone over age 18 can apply. And, you can access your account 24/7 $2,500.00 3.30% 20 years   None B++
Oceanview Life Harbourview MYGAs Multi-year Guaranteed Deferred Market value advisement, as well as expansive age range from 0 to 89 $20,000.00 3.25% 7 years Free – up to 10% of contract value None A-
Nassau Simple Annuity Multi-year Guaranteed Deferred Single-premium, multi-year guaranteed annuity that offers protection from market volatility $5,000.00 3.10% 3, 4, 5, 6, 7 & 10 years Free – up to 10% of contract value None B+
Fidelity Personal Retirement Annuity Variable Both Offers three different investment styles; hands-on, hands-off, sector investing. $10,000.00 6 years Free – up to 5% of your contract value None A-
Jackson National Life Perspective II Variable Deferred Highly customizable with a max annuization age of 95 $5,000.00 Free – up to 10% of contract value 0.25% for contracts purchased with an initial investment of less than $1 million (or which have not yet accumulated $1 million) A
Transamerica Life Principium IV Variable Deferred Back to basics with an investment only strategy $1,000.00 7 years Free – up to 10% of contract value $35 A
MassMutual Transitions Select II Variable Deferred Choose sub accounts that are managed by Oppenheimer Funds and Franklin Templeton Investments. $10,000.00 Free – up to 10% of contract value $40 A++
Brighthouse Financial Variable Annuities with FlexChoice Access Variable Both Receive 5% compounding and Automatic Step-Ups $10,000.00 Free – up to 10% of contract value $30 A
Athene Amplify Registered Index Both Four different index options. $10,000.00   1, 2, or 6 years Free – up to 10% of contract value $30 A
Equitable Structured Capital Strategies Registered Index Both Customizable and levels of downside protection that are up to -30% $25,000.00     Free – up to 10% of contract value 1.15% variable investment option fee A
Allianz Index Advantage Registered Index Both Ability to subscribe to a specific type of index strategy through the company. $10,000.00     Free – up to 10% of contract value 1.25% annual product fee A+
Nationwide Monument Advisor Registered Index Both The industry’s first flat fee, Investment Only Variable Annuity (IOV) $15,000.00     Free – up to 10% of contract value $20 A+
Prudential FlexGuard Indexed Variable Annuity Registered Index Both Provides a guaranteed income stream with ability to choose buffer level $25,000.00   1, 3, or 6 years Free – up to 10% of contract value None A+



In order to determine the best annuity rates for each category, we considered the costs and benefits of each annuity on the market. Costs of each annuity include: the annual fee, withdraw transaction fee and the annuity rate offered by the annuity company. Benefits and perks are different for each person. Initial contribution minimums tends also be a large contributing factors in your purchasing or not purchasing.

In addition, each annuities category has its own criteria. For fixed annuity rates we also considered how much value you can expect to get guaranteed over the volatility in a variable or indexed annuity rate. We find fixed annuity rates range from 1% to 3%. Variable and Indexed tend to be from -2% to 6% interest on your money. This was a large factor in which annuity rate has the lowest net cost.

For annuities meant for those who are trying to build long term retirement or have 15+ years till retirement, we focused on annuity offers that offer the most opportunities to have a sustainable rate over the longest period of time with lowest net cost to the consumer.

For indexed annuities we looked at the length of variable rate, minimum initial premium and fees.

Every A.M. Best Rating was factored when comparing which annuity rate is the best.



Other Annuity Facts To Be Considered


10 Steps to Take Now for a Tax-Free Retirement

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes,” Benjamin Franklin wrote in a 1789 letter.

The significance between that often-cited quotation? It’s often the first attribution to the adage, “Nothing is certain except for death and taxes.”

Steps to Take Now for a Tax-Free Retirement

However, The Yale Book of Quotations quotes “‘Tis impossible to be sure of anything but Death and Taxes,” from Christopher Bullock, The Cobler of Preston (1716). And, also it quotes “Death and Taxes, they are certain,” from Edward Ward, The Dancing Devils (1724).

Regardless of its origins, that adage is arguably one of the most honest statements about life. And, yes. Even while enjoying your Golden Years, you still have to worry about the taxes.

In a way, that kind of seems unfair. I mean, you’ve paid your dues. Now it’s time to enjoy the fruits of your labor. But, you know. Life sometimes just isn’t fair.

Estimating your taxes in retirement.

Now that I’ve ripped the band-aid off and you know that you’ll have to pay taxes, how exactly are they calculated?

Well, they’re based on your income — just like your pre-retirement days. However, different rules apply to the various retirement income streams that you’ll receive.

Here are the most common types of retirement income and the rules that are attached to each.

Social Security income.

If this is your sole source of income, then you don’t have to pay taxes. But, what if you have other sources of income? When you file a return, you might have to include up to 85% of your benefits as taxable income.

Thankfully, the IRS has a handy tax worksheet to help you determine how much your benefits will be taxed.

IRA and 401(k) withdrawals.

The good news? Generally, Roth IRA distributions are tax-free. The reason is simply that you paid taxes on this money upfront.

That’s not the case with tax-deferred retirement accounts. These include 401(k) plans, 403(b) plans, and 457 plans, as well as traditional IRAs.

Why? Well, since they’re tax-deferred, that means you must report withdrawals from these plans on your tax return as taxable income.

Just note that the amount of tax will depend on a couple of factors—namely, the total amount of income and deductions you have. And what tax bracket you’re in.

Pension income and annuity distributions.

According to the IRS, “If you receive pension or annuity payments before age 59½, you may be subject to an additional 10% tax on early distributions, unless the distribution qualifies for an exception.”

“The additional tax generally doesn’t apply to any part of a distribution that’s tax-free or to any of the following types of distributions:”

  • That was “made as a part of a series of substantially equal periodic payments that begins after your separation from service.”
  • You “made because you’re totally and permanently disabled.”
  • They were “made on or after the death of the plan participant or contract holder.”
  • You “made after your separation from service and in or after the year you reached age 55.
  • That is “up to $5,000 made within a year of the birth or adoption of your child to cover birth or adoption expenses.”

One way to avoid paying taxes on your pension income is to have your taxes withheld directly from your pension check.

Also, the interest portion of your annuity will be included in your taxable income. You’ll also pay taxes on earnings or investment gains.

Investments income.

Just like you did before retiring, you’re going to have to pay taxes on capital gains, dividends, and interest income. Any income you’ve earned from investments will be reported on a 1099 tax form each year. And, the financial institution that holds these accounts will send you this form directly.

What if you’re selling investments to generate a retirement income? You must report this on your taxes.

If you have a mature CD in the amount of $10,000, it’s not considered taxable income.

Gains when selling your home.

As long as you’ve lived in your home for at least two years and you have gains less than $250,000 if you’re single ($500,000 if you’re married), then you won’t have to pay taxes on selling your home. It does get tricky when you’re selling a home that you’ve rented out.

How can you calculate your tax rate?

Well, this will depend on the sources and income. Generally, you’ll want to list all of your retirement income and add that up. Next, you’ll reduce that by the deductions that you anticipate for the year.

You can enter this information into your tax software program. Or, you can save yourself the hassle and pass it along to your accountant.

But, I have some good news for you. You can minimize retirement taxes if you take the following steps.

1. Know your tax bracket.

If you want to reduce your tax burden or possibly enjoy a tax-free retirement, then this is the absolute first step you must take.

How exactly do tax brackets work? Well, in the States, we have something called a progressive tax system. Tina Orem over NerdWallet explains that this means those “with higher taxable incomes pay higher federal income tax rates.”

However, there are a couple of caveats to be aware of.

  • “Being ‘in’ a tax bracket doesn’t mean you pay that federal income tax rate on everything you make,” adds Orem.
  • “The government decides how much tax you owe by dividing your taxable income into chunks — also known as tax brackets — and each chunk gets taxed at the corresponding tax rate.”

In both 2020 and 2021, there were seven federal brackets; : 10%, 12%, 22%, 24%, 32%, 35% and 37%. Each depends on your taxable income and filing status.

So, here’s how this could be applied to you;

  • You will owe 10% of taxable income if you make $0 to $9,875.
  • Do you make $9,876 to $40,125 ($19,751 to $80,250 for couples)? If so, you’ll owe $987.50 plus 12% of the amount over $9,875. For joint filers, this would be $0 to $19,750
  • You would fall into the 22% if you made $40,126 to $85,525 and $80,251 to $171,050 for joint filers. As such, you would owe $4,617.50 plus 22% of the amount over $40,125.
  • If you earned $85,526 to $163,300 if single and $171,051 to $326,600 if married then you’ll have to pay $14,605.50 plus 24% of the amount over $85,525 in taxes.
  • You’ll owe $33,271.50 plus 32% of the amount over $163,300 if you had income between $163,301 to $207,350 (single) and $326,601 to $414,700 (couples)
  • For those earning $207,351 to $518,400 ($414,701 to $622,050 if filing jointly), you’re on the hook for $47,367.50 plus 35% of the amount over $207,350.
  • If you raked in $518,401 or more (single) and $622,051 plus for couples, then you’ll owe $156,235 plus 37% of the amount over $518,400.

One way to avoid paying more in taxes than you have to, and you have both traditional and Roth accounts, then limit your traditional account withdrawals. This will ensure that you won’t be taxed at a higher marginal rate. After that, supplement that retirement income as needed with tax-free withdrawals, such as from a Roth account.

2. Asset location.

“Financial advisors generally encourage account diversification among clients — meaning, having some savings in a taxable account, a traditional (pre-tax) 401(k) or individual retirement account, and a Roth 401(k) or IRA,” writes Greg Iacurci for CNBC.

As a result, investors have more flexibility when withdrawing funds.

“Investors can maximize their tax savings by holding certain investments and funds in the appropriate type of account,” he adds. Known as “asset location,” this “boosts an investor’s after-tax rate of return.”

“For example, investors should generally consider holding stocks and stock funds in taxable accounts,” says Iacurci. “These investments are more ‘tax-efficient — meaning most of their return is from capital gains taxed at a rate that’s less than ordinary income.”

“On the other hand, investors should generally hold bonds and bond funds in retirement accounts,” Iacurci advises. “These investments are less tax-efficient since most of their returns are dividends taxed as ordinary income.”

So, let’s say that you’re an investor with a grand in a taxable account and another $1,000 in a 401(k) and want “a 50-50 stock-to-bond allocation.”

“Holding $1,000 of stocks in the taxable account and $1,000 of bonds in the retirement account (instead of doing a 50-50 stock-bond split in each account type) would generally be the most tax-efficient approach,” he states.

3. Diversity your tax liability.

“When looking at your retirement savings, it’s important to consider the types of accounts you’re saving and investing in. Tax-deferred accounts,” recommends Tony Drake, CFP®. Examples include a 401(k) and traditional IRA. These “offer tax advantages now” since you “contribute money before taxes.” However, you’ll still owe the IRS when you make a withdrawal.

“Tax-exempt accounts, like a Roth IRA or Roth 401(k), offer tax advantages in the future,” adds Drake. “Your money is taxed before you contribute to the account, but you can withdraw it tax-free in retirement.”

You should also consider taxable accounts, such as brokerage and savings accounts. You’re “taxed on the interest you earn and on any dividends or gains,” he says. “Investment accounts are an important part of your overall financial plan, especially during your working years as you grow and accumulate your savings for retirement.”

“How much you contribute to your retirement accounts during your working years and the types of accounts you contribute to will impact how much you pay in taxes both now and in retirement,” Drake adds. “Diversifying your savings and investment accounts will help you better control your tax situation in retirement; you gain more flexibility on how much you withdraw and from which account.”

4. Catch-up on contributions.

Once you hit age 50, you’re eligible for an additional tax break if you make catch-up contributions. For 2020 and 2021, you’re permitted to defer taxes on an additional $6,500 in a 401(k) and $1,000 in an IRA.

5. Make tax-exempt investments.

In addition to 401(k)/403(b) employer-sponsored retirement plans and IRAs, here some other tax-free investments you should throw money at;

  • Health Savings Account (HSA)
  • Municipal Bonds
  • Tax-free Exchange Traded Funds (ETF)
  • U.S. Series I Savings Bond
  • Bonus: Indexed Universal Life Insurance
  • Charitable Donations/Gifting
  • 529 Education Fund
  • 1031 Exchanges

6. take advantage of the saver’s credit.

Have you earned up to $32,500 and you’re single? What if you’re a couple with $65,000 set aside?

You can make contributions to your 401(k) or IRA using the saver’s credit. If you take advantage of this, you can either increase your refund or reduce the tax owed. How much? It could be as much as $1,000 for individuals and $2,000 for couples.

7. Watch your timing.

A surefire way to pay the lowest amount of taxes throughout your retirement is to maintain a level of income. Why? Because if your income was low this year, but high next, then you will end up paying more in taxes.

In other words, you want your withdrawals and selling of assets to be steady. For instance, if you sold capital assets at a loss, you might want to unload other assets that performed well to offset your capital gains.

Another suggestion? If you have more income from earnings, assets sales, or other taxable income in one year, then wait to withdraw money from traditional retirement plans until December 31.

8. Be strategic about Social Security benefits.

If you don’t need your Social Security benefits, then pushback receiving this benefit until after 70. The reason being is that you’ll earn additional credits, which will increase your monthly benefits. You also don’t have to worry about paying taxes on Social Security right now.

Once you receive these benefits, they’ll either fully tax-free or are included in your gross income at 50% or 85%. It just depends on your income.

Just know that if your provisional income, which is the taxable portion of your Social Security benefits, is below $25,000 and you’re single, your benefits won’t be taxed. For those who filed jointly, this would come out to $32,000.

9. Relocate to a tax-friendly state.

If you don’t already reside in a tax-friendly state, consider relocating to Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming. These states don’t have income taxes.

New Hampshire taxes only interest and dividends. Meanwhile, Illinois, Mississippi, and Pennsylvania don’t tax distributions from 401(k) plans, IRAs, or pensions. And Alabama and Hawaii don’t tax pensions but still tax distributions from 401(k) plans and IRAs.

Thanks to the Tax Cuts and Jobs Act, this is particularly important as just $10,000 in local property, state and local income, or sales taxes can be deducted for federal income tax purposes.

Also, federal law bars taxing residents on retirement benefits that were earned in another state. So, if you want to pack up and leave high-tax states like New York or California, you can still move to a no-tax state and still collect your pension tax-free.

10. Remember required minimum distributions.

A required minimum distribution, RMD, is the required minimum amount of money that you must withdraw from a tax-deferred employer-sponsored retirement plan. These include most 401(k)s and IRA. And, it occurs when you reach age 72 — or if you turned 70½ in 2019.

If you don’t comply, the IRS will slap you with a hefty penalty fee, usually taxed at 50%.

To ease this burden, consider;

And, finally, make sure that you work with a financial advisor so that you are taking the right and legal steps to enjoy a tax-free retirement.

Understanding Your New Investment Accounts

How do you know what new investment accounts you should open when you’re a beginner? Investing is a topic that many find stressful. Especially when you are just getting started. There is always the advice of “talk to a financial advisor!” but when advisors are often looking for clients that have a minimum of $250,000 of investable assets that they can charge 1% on, is that always a feasible choice? As someone who used to be a financial advisor, I’d like to say that investing without a financial advisor has actually never been easier. 

Big, well-known firms have all dropped trading fees to $0 to compete for your business. New companies are opening that are strictly online or on mobile apps. Account balances and your net worth update instantly. We can literally handle all of our finances on the rectangle that fits in our pocket!

It’s easy to get overwhelmed with all of the options available. So, what investment accounts should beginners look at opening first?

The before-you-invest account

Whether you are a beginner to investment accounts or not, you should make sure to have one account checked off before starting. An emergency fund. How big your emergency fund needs to be is up to you and your needs, but there should be some savings set aside for the inevitable.

When you are investing your money, it is no longer “liquid”. This means it is more difficult to pull out cash to buy an item or pay for an expense. It’s not impossible- it just takes the transaction time of selling your investment position, then moving the cash from your investment account to your checking account. This process can take several days and may incur taxes along the way, depending on which account the money is taken from.

To avoid unnecessary taxes or potentially selling your positions at a loss, you should have an emergency fund in place to cover expenses that pop up. Yes, your investment accounts are there, and your money if you need it, but they should not be your first line of defense!

Two Types of Investment Accounts

There are many, many different investment account options out there. However, all of the different accounts you see can really boil down into two categories. Those categories are retirement and non-retirement.

One big mistake beginners make with investing is thinking they are too young to worry about saving for retirement. But investing and retirement planning actually go hand-in-hand! Investing is a tool to build wealth. Retirement is an inevitable phase of life that requires wealth

To make the most out of your investing experience, you should start saving for both short and long-term goals. While retirement is a crucial thing to be saving for, it’s not normally your only financial goal. There are inevitable expenses in the short to medium term that investing can also help fund. 

Understanding the type of account that will best fit your goals is key. Then, knowing that life will throw you all types of expenses, put your investments to work to help fund them.

Retirement Accounts

You should understand that ‘retirement accounts’ is actually a huge umbrella! While they all have the same objective: money saved for your future, their ways to get there are all different. Each account has a slightly different set of rules, limitations, and tax situations. This is why you might be more comfortable talking to a financial or tax advisor about your unique situation. 

Start investing in your 401k or 403b

The first investment account that beginners should consider is, hands-down, a 401k or 403b through an employer. This is because of ease of entry, not because of any other investing perks! If you don’t have an employer 401k or 403b through work, don’t panic. There are still plenty of great investment account options for you.

If you do have access to a retirement plan at work, use it! Saving your money can be a difficult habit to get into. It will make saving a whole lot easier when a portion can automatically be taken from your paycheck.

Money that is coming directly from your paycheck also gets the perk of not being taxed. Your 401k or 403b contributions get deducted from your taxable income when you file your taxes. This means your seeing some tax savings on your saved money!

What about the “employer match”?

An “employer match” is a deal you don’t want to leave on the table. This is money that your employer will put into your account, for free, based on an amount you are putting in. It’s common to hear of employer matching of 3-6%, but I’ve witnessed matches as high as 10%. Yeah, I was jealous too. 

This percentage could be based on your income, or it could be based on a dollar amount you contribute. But, regardless of the formula, you don’t get the match unless you are also contributing to your account!

Ask questions about employer matches and keep asking questions until you understand how it works! In the best-case scenario, you should be shooting to contribute enough to get the full employer match that’s available.

How to start investing when you don’t have a 401k

While saving in a 401k and employer matching is nice, not everyone has access to it. If you don’t have a 401k or 403b option at work, you’re going to have to be a little more involved in your finances. This is not a bad thing! This means you have a LOT more freedom as far as your investment options. Having access to all options means you can choose investments with lower fees, which is a common complaint in 401k and 403b plans.

For those that don’t have employer plans, or for those that do but who want to be doing more saving, there are Individual Retirement Accounts, or IRA’s. Make sure you understand the IRS’s rules on these accounts! While there are perks, there are also limitations. The most common one is not being able to withdraw your savings until age 59.5, the deemed “retirement age”.

These accounts can be invested, just like employer plans. Being able to invest inside your retirement account is the key ingredient to having enough money to retire. 

IRAs beginners should start with

The first investment accounts beginners without 401k’s should consider are the Traditional and Roth IRA. These accounts can be funded up by anyone with earned income, which is income from a job or self-employment. Things that don’t qualify as earned income are interest, dividends, alimony, child support, and social security.

Opening up a traditional or Roth IRA is not difficult, and it isn’t something that should intimidate you! You open your account with a custodian, like Vanguard, Fidelity, or Charles Schwab. Most custodians offer free account opening, no minimums, and free trading. Most accounts can be opened online, in less than 15 minutes. Remember when I said investing without an advisor has never been easier?

Traditional or Roth IRA?

Should you start investing in a traditional or Roth IRA? This is one of the biggest questions for new investors. Both accounts will help you save for your retirement years, but they have a very big difference when it comes to how they are taxed.

When you are saving in a traditional IRA your contributions will be deducted from your taxable income. This is how 401k’s and 403b’s work as well. When you put money into your traditional IRA, it will get subtracted from your income when you file your taxes. This makes the amount of money you owe taxes on smaller, and gives you tax savings today. For those who are looking to replace not having a 401k at work- the traditional IRA is a closer comparison.

Note: there are Roth 401k and 403b’s that exist, to which the above does not apply!

The Roth IRA works differently. In the Roth IRA, you do not deduct your contributions when you do your taxes. This means you are not taking any tax savings today. Instead, you most likely already paid income taxes on the money that went in. I know, this doesn’t seem like a great tax perk right now, but bear with me…

Taxes on withdrawals

There are key differences to these accounts when you are withdrawing money from your IRA. This is when the Roth IRA’s perks begin to show! Because you already paid taxes on the money you put into your Roth IRA, in the IRS’s eyes, you’re done paying taxes. Your entire account balance is yours. Imagine… 20, 30, 40, 50 years down the road when you are withdrawing your money from these accounts. Now imagine never having to worry about paying taxes on it. Doesn’t that make you want to plan your retirement vacations right now?

The traditional IRA had better tax perks in our saving years, but now, they aren’t looking as nice. In the traditional IRA, since you were deducting your contributions, you technically haven’t paid any taxes yet. The money you withdraw from traditional IRA’s get taxed as income. This means you will have to pay income taxes on every single withdrawal. How much in taxes? Well, that depends on whatever tax system you’re in at that time.

Many people agree that already paying their taxes provides a special peace of mind. Especially for those who think taxes will increase in the future. This makes the Roth IRA a favorite for many. However, you will want to make sure you do not exceed the annual income threshold for making contributions. 

It’s likely you will need to use both accounts in your lifetime, so don’t get hung up on which is “better”. If you are just beginning in one of these investment accounts, getting started is the important part. 

Traditional and Roth Annual Limits

The annual limit for contributions to these accounts in 2020 and 2021 is $6,000 or $7,000 if you are over age 50. Note that is the combined limit, not individually! If you put $6,000/$7,000 in a Roth IRA in a given year, you could not put any in a Traditional IRA that same year. You could put $3,000 in each, or any combination that adds up to the limit, but not more than.

This is an area where 401k’s and 403b’s show more benefit. The annual contribution for those accounts is much higher at $19,500. People trying to save a significant amount for retirement are capped by the much smaller limit of the traditional and Roth in comparison. 

However, those just getting started might benefit from a lower annual limit, as it makes a great goal. Having a $6,000 max on this investment account when you’re a beginner could mean setting an investment goal of $500 a month. This would max out an account, and could add up to a large sum of money by retirement time!

Other IRA Options

When you are self-employed there are even more IRA options for you to start investing. But if you don’t expect to be investing more than $6,000 a year, there is nothing wrong with sticking with the Traditional or Roth. 

If you are hoping to put away more than that for your future, you should consider opening a SEP or SIMPLE IRA. Which one you choose will depend on your business and the number of employees.

When you are a beginner to investment accounts, don’t feel like you need to open multiple IRA’s at once! Decide which one makes the most sense for your current situation. You might want to read more about the differences in tax perks and see which account is most useful given your current situation.

Non-Retirement Accounts

Once you have some money being regularly invested for your future, you should consider other financial goals. If you know you have big expenses coming up in the next 5-20 years, things like homes, weddings, or college tuition, investing could help you out. But keep in mind, It’s not a good idea to start investing for short-term goals. The market could be down when you are in need of your funds, and you could risk having less money than you put in. The longer the time-frame, the greater your chances of a balanced out, positive return.

Setting up non-retirement investment accounts can also prevent you from tapping into retirement funds early if you need money for an emergency. This is also why you should have an emergency fund established before you start investing.

Non-retirement investment accounts do not see the same tax savings as retirement accounts. You will not write off any of the money you put in, and when you sell out of a position, you will owe taxes on any gains. You should get familiar with short-term and long-term capital gains taxes when you are investing in these accounts. Always consult a financial or tax professional if you are unsure about your tax situation!

Individual brokerage accounts

This is probably the most common investment account in the non-retirement category. Beginners who opened investment accounts through apps like Robinhood and Acorns most likely opened up an individual brokerage account. As the title suggests, this account is for individuals, so only one person can be listed on the account. 

Again, the biggest perk is inside this account is being able to invest. Unlike money in your savings account, you can invest the cash you move to these accounts into companies or commodities. You can buy stocks, exchange-traded funds, mutual funds, index funds, and more. There is no guarantee your money will grow. Remember, you should always be doing your own research before you start investing, and understand the risks involved.

You should also be aware of the tax happenings inside of your new investment account. You will pay short-term capital gains tax on positions held for less than a year. If you hold your position for over a year, you will be taxed at the lesser, long-term capital gains tax rate.

Don’t let tax fears prevent you from starting your investing journey! Your custodian will send you tax forms in January or February with any tax information you’ll need for filing your taxes. You only owe taxes on the growth of your money. Paying taxes on your growth is better than not growing at all!

Joint brokerage accounts

If you have a spouse, you might be considering a joint brokerage account for your money goals. You can open joint accounts with non-spouses too, just use caution, as both account owners will have full access! Joint accounts might be considered for business partners or family members, just make sure all of the terms are understood by all parties.

Joint brokerage accounts are treated the same as individual accounts, except they allow more than one account owner. You should anticipate the same investment options and tax rules when it comes to this account! 

If you open a joint investment account, make sure you are clear on what will happen to the account in the event of an account owner’s death. In most cases, the account will remain intact for the surviving party. This is normally fine when your joint owner is your spouse, but might not be ideal in other situations.

Investing for your children

Common non-retirement goals that people open investment accounts for are college or savings for their children’s future. If you know helping out your kids is something you want to do, consider setting up an investment account to start saving in on their behalf. Investing to help reach these pricey goals might mean you reach them more quickly than saving in a bank account would. 

529 Plans

529 Plans are investment accounts specifically designed for saving for education. The money you contribute does not see a tax deduction as a qualified retirement account would, but there are other tax savings. You do not have to pay any capital gains tax on the growth inside this account if the money is used for qualifying education expenses.

You will have to pay taxes if money is taken out for non-education expenses. Plus an additional 10% penalty. If you are unsure if your kids will use this money for education, make sure you understand the tax rules on this account before saving in one!

UGMA/UTMA Accounts

Opening a custodial account is another way to invest for minors, or to help your children learn about investing their own money. You will still be responsible for taxes on gains, and there will be no tax perks for education expenses, but there aren’t penalties on withdrawals either. The UGMA (Universal Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) are both ways to invest on behalf of your children. Both accounts are very similar but you will want to do your research or talk to a professional to see which is best for you. 

You would list yourself, or another guardian, as custodian of the minor’s account. The custodian must act as a fiduciary, or with the child’s best interest when it comes to account management. Once the minor reaches a certain age, they become the full account owner. 

If going to college is in the future, make sure you understand the rules with financial aid and different accounts!

Recap: Investment accounts for beginners

Understanding investment accounts as a beginner can be a lot to navigate! Don’t let the huge variety of investment options overwhelm you. There is an account that can help you with just about any life goal. Commit to learning more with time, and investing could become an exciting part of your life!

The first investment account beginners should open is one for retirement. Make sure you are considering your future and putting money aside for it. If you have a 401k or 403b at work, start there. If not, look into Roth and traditional IRA’s. 

Be realistic about upcoming expenses for your future. Consider investing in non-retirement accounts to meet your goals. Remember to stay educated and diversified! Understand the tax implications of different accounts, and consider talking to a professional before you make expensive decisions. 

Enjoy the process

Above all, enjoy the process! If you are new to the world of investing, try reading or listening to audiobooks on the subject in your free time. Listen to podcasts and find groups on social media. Make the learning process enjoyable! Be wary of your neighbor’s hot stock tips, and try not to let the news headlines about the stock market dictate your decisions. Educate yourself, stay diversified, and grow your wealth!

Retirement Account Contributions Before the Year Ends

Well, we are truly on the final day of 2020. As if you didn’t already have enough places to figure out where your money needs to reach, there’s another consideration—your retirement account contributions. 

“But retirement is so far away!”

The only person who can get away with saying retirement is far away is a 16-year old. Anyone older should be doing at least a little saving for their future. If you hope to retire one day (we all do, right?), you’ll need to be doing some planning and saving.

You might be wondering what the rules are when it comes to certain accounts. Start by learning what retirement accounts you should contribute to before the year is over.

Retirement Account Contributions to your 401k/403b

This is one of the more popular places to save for retirement for many Americans. The 401k and 403b are employer-sponsored retirement plans. This means your employer set up the plan, and a third party manages the account. 

The main difference between the two is that a for-profit company sets up a 401k, and a non-profit or government organization sets up a 403b. Examples of people who might have a 403b are teachers, people who work in hospitals, and government workers.

If you work for a business whose purpose is to create profit, you will see a 401k. The employers will abide by different tax rules, but the tax rules on these two accounts are the same for the employee who holds the account.

Tax benefits of retirement account contributions

You like paying less in taxes. Any contributions or money that you put into your 401k or 403b gives you a direct tax benefit in the year of your contribution. Money put inside these accounts gets deducted from your income when you file your taxes.

Shrinking your taxable income will lower your taxes owed because you are responsible for paying taxes on a smaller amount of money.

Say you make $50,000 in a year. You contribute $400 a month to your company 401k. At the end of the year, your contributions total $4,800. When you file your taxes, that $4,800 will be deducted from your income.

Now you are only responsible for owing taxes on $45,200. There are other things to consider and other deductions that will further lower your taxable income, but retirement account contributions are one of the easiest ways to reduce your taxes.

The money inside your retirement account now has the ability to be invested! Those investments are allowed to grow, tax-deferred. That means you don’t have to worry about paying any capital gains on sales inside the account. You will only be responsible for paying income tax on withdrawals from the account, hopefully after age 59.5.

Potential tax penalties

This is a retirement account, so there are some rules for technically accessing your savings. The current rule says you have to be age 59.5 before taking withdrawals from your IRA’s, without penalty. Taking money out before that could result in a 10% penalty, on top of the income tax owed on withdrawal. 

There are certain circumstances where the penalty isn’t applied, including a new one put into place this year, which took away the penalty for early withdrawals due to COVID. If you plan to access your retirement savings early, make sure you know how it will be taxed and if it will be penalized.

2020 401k/403b Contribution Deadline

Unlike Individual Retirement Accounts (IRA’s), the 401k and 403b normally need to be funded by the end of the year. This is important to note if you are currently using one of these accounts to save for retirement. If you have contributions coming directly out of your paycheck, you might want to adjust your contribution amount for the final month to maximize your tax savings for 2020.

A great goal when it comes to saving for retirement is 10% of your income. Depending on what stage of life you’re in and how much you make, 10% might seem daunting. If you are just starting out and money feels tight, you can start with a smaller percentage.

One great tip for starting small is to increase your contributions by 1% every year. For example, you might start by saving 5% of your paycheck this year. Next year, you would increase your contribution to 6%, then 7% the following year. 

Could your retirement account benefit from a 1% increase this month? And how might that small increase impact your bottom line come retirement time? Part of the magic with these small changes is that we will hardly notice the difference in our checking accounts. Let compounding interest take over, and the effects are anything but small!

2020 401k / 403b Contribution Limit

You might be ready to throw as much money as you can into your retirement account, but there are some rules there. Including an annual limit for how much money you can contribute in a given year. 

For 2020, the annual contribution limit to 401k’s and 403b’s is $19,500.

For those over age 50, there is an additional $6,500  “catch-up” contribution, bringing the annual limit to $26,000.

Employers might also be contributing to your account, known as an “employer match.” If your employer is offering a match, try to contribute enough to get the full match. Employer matches are essentially free money in your account, which you don’t want to leave on the table.

The annual total for both employee and employer contributions into a 401k or 403b is $57,000. (Yeah, you might need to remind your employer about that).

2021 401k/403b Contribution Limit

The retirement account contribution limit does not increase for employees in 2021. The limit remains at $19,500 or $26,000 if over 50. However, there is an increase in the employer side, bringing the total of employee plus employer contributions to $58,000.

How far are you from maxing out your 401k or 403b? This might be a good time to set some savings goals for next year and try to get closer to the max if you aren’t already there.

What if you don’t have a 401k or 403b?

There are many Americans that don’t have access to a 401k or 403b through an employer. They are not a requirement for employers to provide, and many small businesses find the cost of setting up and maintaining them is too high. If you are self-employed, you will also find yourself in a position without access to one of these accounts. 

If you find yourself without a 401k, you might be asking, “How am I you supposed to save for my future?

Retirement account contributions to IRA’s

401k’s and 403b’s are not the only retirement accounts out there! There are various Individual Retirement Accounts (IRA’s) available. You don’t need an employer to open these accounts; the only requirement is having earned income.

IRA stands for Individual Retirement Account, and this is another great place to save for retirement. If you don’t have access to a 401k or 403b, you will definitely want to utilize an IRA. There are quite a few different kinds, including the traditional IRA, Roth IRA, SEP IRA, and SIMPLE IRA. 

Any contributions to a traditional IRA, SEP IRA, or SIMPLE IRA will be tax-deductible in the same way a 401k or 403b is. You see the tax benefit of lowering your taxable income the year of the contribution,  and you will also see the same tax benefits of tax-deferred growth.

Trading in your IRA also won’t incur capital gains taxes throughout the year.

When will you have to pay taxes? When you make withdrawals and pull the money out. To avoid the extra 10% penalty, withdrawals should be planned for retirement and after age 59.5.

The Roth IRA

This retirement account has a whole different set of tax rules, but some can prove very beneficial in the future. Unlike the other accounts we talked about, contributions to your Roth IRA are NOT deducted from your income! Does that mean you don’t see any tax-savings? Not quite.

Since you are NOT deducting Roth contributions, you agree to pay taxes (or have already paid taxes) on the money you put in. Your money is taxed at today’s known tax rates. When you pull your money out in retirement, it will NOT be taxed again.

You will be paying taxes eventually on the money inside your 401k, 403b Traditional, or SEP IRA’s, but you are paying taxes now instead of later with the Roth. Why would you want to do that? We are in historically low tax brackets currently.

People who find themselves in lower tax brackets, like 10% and 12%, can lock in these low tax rates with Roth contributions.

There are certain limitations to Roth IRA’s, one of them being an income limit. If you make too much, you will not be able to fund a Roth IRA directly, so make sure you qualify before making contributions.

How do you open an IRA?

You open an IRA with a custodian. Opening one is just as easy as opening a checking or savings account.  Custodians offer the ability to place trades in the stock market (and in bonds and various commodities) with your cash and provide a safe, insured place for you to keep your investments.

Well-known custodians that have been around awhile are Fidelity, Vanguard, Charles Schwab, and TD Ameritrade. There are also more and more online custodians popping up, like Ally and SoFi. 

You can link your checking or savings account to your investment account and quickly move money into it. To replace contributions coming out of your paycheck, like for a 401k or 403b, you can set up automatic deposits to take place every month or two weeks. Be sure to invest that money.

2020 IRA Contribution Deadline

Retirement account contributions to your IRA have a different deadline than 401k and 403b contributions. All annual contributions have the same deadline, Tax Day, which is normally April 15th. If the 15th is a weekend, it will be the following Monday.

This deadline gives you a little more time and flexibility for making contributions. Although you have until Tax Day, remember, a big point of these contributions is getting the tax savings.

If you file your taxes in February and contribute to your traditional IRA for 2020 in March, you will want to amend your taxes to account for the difference. Want to get your taxes done early? And don’t want to file an amendment?  You should make all IRA contributions before you go to file your taxes.

When you are making contributions to your IRA in 2021, there will be a selection where you can select if the contribution is for 2020 or 2021. However, you are the one responsible for reporting your contributions on your taxes. If you are not deducting your contributions, you don’t see any tax savings.

You are responsible for paying income taxes on your IRA withdrawals in retirement (minus the Roth), so not getting the tax deduction today means you are paying double taxes on that money. You do not want that.

2020 Traditional and Roth IRA Contribution Limit

The 2020 annual contribution limit for the traditional and Roth IRA is $6,000. If you are over age 50, the limit increases to $7,000. These limits are much lower than the 401k and 403b limits, which are $19,500 and $26,000 if over age 50.

This $6,000 (or $7,000) limit is for the Traditional and Roth combined. Not each. You could potentially put $3,000 into a Roth IRA and $3,000 into a Traditional IRA, or any variation that adds up to a combined total of $6,000. Or you could put the full amount into just one of these IRAs. The choice is yours, as long as they don’t go over the limit.

Want to fund a 401k and an IRA? Be aware of any limitations.  Your earnings can impact how much you can deduct from IRA contributions. Make sure you understand the rules and limitations when you are funding these accounts.

Increase on retirement account contributions for 2021

Most IRAs did not see an increase in the contribution limit for 2021. It’s not normal for them to increase every year, but they regularly get increased to keep up with cost-of-living. 

The places that did see an increase were the employer sides. Employers can contribute up to $1,000 more, bringing the total of employee contributions ($19,500/$26,000 if over age 50) plus employer contributions to $58,000 for 2021, previously $57,000. 

This increase also applies to self-employed individual retirement accounts. Limits for the SEP-IRA also go up to $58,000 in 2021 (limited to 25% of your self-employment income). SIMPLE IRA’s remain the same at a limit of $13,500.

Staying on top of your retirement account contributions

Once you understand what accounts can be used to save for retirement and their deadlines, the only thing left is to keep up with your retirement contributions. The easiest way to save for retirement is to automate your process as much as possible.

Getting 401k or 403b contributions taken directly from your paycheck is a great way to make sure you are saving consistently.

For IRAs, you will want to manually set up automatic deposits, and if possible, automatic investing.

The worst thing you can do? Ignore saving for your future. Investing on your own has never been easier, and there are too many great tax perks on retirement accounts to pass up.

Take advantage of the time you have and the magic of compounding interest that is possible inside your retirement accounts. Retirement is a lot more expensive than many people think; make sure you save for this imminent life phase.

How to Compare Health Insurance Plans During Open Enrollment

It’s that special time of year. Snuggled right in with Black Friday, Cyber Monday, Thanksgiving, and the start of real holiday shopping — the Open Enrollment Period for your health insurance plan. If you are not sure how to get your own health insurance, this guide will help you compare health insurance plan options.

“Navigating health insurance in the U.S has never been more fun or exciting. Especially if you’re self-employed or currently ‘rolling the dice’ and living without insurance.”

Said no one, ever.

Unfortunately, health insurance can sometimes feel like a necessary evil. If you have insurance provided through an employer, you can probably ignore this time of year and carry on, business-as-usual. But, if you are self-employed or on a state needs-based plan, you should commit these dates to your memory.

Open Enrollment and Special Enrollment Periods

November 1st – December 15th marks the Open Enrollment Period for health insurance. This is the time of year when you can make changes to your health insurance plan. This is also when you can compare your current health insurance plan against others.

Or you can get insured on a new plan if you are currently going without insurance. Fortunately, if you need to make changes to your insurance, we are now in the Open Enrollment Period.

Again, this is the only time of the year where you can make insurance changes- unless you qualify for a Special Enrollment Period.

A Special Enrollment Period is a 60-day window from a life-changing event that would cause you to need new insurance. Common events include; getting married, divorced, having a baby, losing a job, and moving.

When you enroll in a new plan, your coverage will begin on January 1st the following year.

What happens if you don’t qualify for a Special Enrollment and miss the Open Enrollment? You’ll have to wait for next year’s Open Enrollment. This means potentially another year (or more) without coverage.

If “get insurance” has been an item on your to-do list, make sure you put these dates on your calendar. When you are ready to compare insurance plans, you will use the marketplace on healthcare.gov. This is the government website that hosts all of the available insurance plans and all of the information about enrolling.

The healthcare link is also where you go if you are enrolling for the first time or applying for a needs-based plan.

What you should be comparing in a health insurance plan.

  1. Monthly premiums that don’t break the bank
  2. Deductibles and out-of-pocket-maximums that won’t put you in debt
  3. If current doctors are in-network and prescriptions
  4. Office visits and co-pays that work for your health needs
  5. Compare plans that are HSA compatible.

1. Monthly premiums that don’t break the bank

The first thing to compare in health insurance plans is the premium. Your monthly premium is the amount you pay to have insurance. The dollar amount will probably be what your eyes naturally gravitate towards when you’re shopping for plans.

This number will also likely be what impacts you most financially unless you expect a lot of visits or out-of-pocket costs. Comparing the monthly premiums of your insurance plays a big part in choosing your plan.

Monthly premiums will vary depending on the type of coverage you have. Great health insurance comes at a price, and the better your insurance is, the higher the monthly premium will be.

Your age and location will also impact your monthly premium. A 26-year-old Tina in Idaho might pay less than 36-year old Theo in Florida, even if they have similar plans and coverage.

Deciding how much you can afford versus how much insurance coverage you’d like isn’t a fun decision to make. In a way, you’re gambling on your health. Do you go to the doctor frequently or expect 2021 to be an expensive year with doctor’s visits?

You might be better off on a plan that provides more coverage at the cost of higher monthly premiums. If you are healthy and rarely use the doctor, you might feel more comfortable on a cheaper plan.

The key to comparing premiums is finding the balance between what you can afford and the care you need.

Premium Tax Credit

What if you are not earning a high-income and the thought of trying to afford insurance is stressing you out? See if you qualify for the Premium Tax Credit.

This is a tax credit that is given based on income and members of your family. The credit can be applied immediately and will lower your monthly premium (sometimes up to hundreds of dollars).

To see if you qualify, you can read more about the Premium Tax Credit here. This tax credit can make paying for insurance from “no way” to “annoying, but doable.”

Insurance searching tip: Plans on the marketplace operate on a metallic tier structure. Bronze plans are typically the cheapest and have the least coverage. Next is Silver, and then Gold, which will have the best coverage and likely be the most expensive.

2. Deductibles and out-of-pocket-maximums that won’t have you swimming in debt

What’s the next thing you should be comparing when you’re shopping for a new health insurance plan? The deductible and max-out-of-pocket.

These amounts might be the same on some plans, but it’s common to see out-of-pocket maximums that are higher than the deductible. Make sure you understand the difference between the two.

The deductible

Your deductible is the dollar amount you need to pay before insurance kicks in and starts sharing the cost. Whenever I think about deductibles, I imagine surviving a horrific accident — and how much it will cost.

A little morbid, yes, but isn’t this what insurance is for? Having an $8,000 deductible means you are responsible for paying $8,000 of medical costs before insurance shares the cost. Once you hit that magic number, insurance kicks in and starts paying their agreed percentage.

Coinsurance is the percentage of your medical costs that you are responsible for paying. Depending on the tier your insurance is in, this could be anywhere from 10-50%. If your coinsurance is 20%, that means your insurance will cover 80% of your medical costs, leaving you with 20%.

Please note that insurance these days often has you paying the $8,000 out of pocket first and then only pay 80%. Pay attention to all of the things insurance is currently charging for your premium and what you really get. Shop around if you can.

The out-of-pocket maximum

An out-of-pocket maximum is different than the deductible. The out-of-pocket maximum is the most you will have to pay in a given year and is the total of your deductible amount plus what you pay in coinsurance.

Once you hit your out-of-pocket max, your insurance starts paying 100% of your costs — not just the percentage it was previously paying (sometimes–make sure you have the truth). Some plans have the deductible and max-out-of-pocket as the same amount, but if they are different, now you understand why.

Your insurance works on a calendar year basis, and your deductible and out-of-pocket maximums start over at $0 every year on January first. Keep this in mind if you have the choice of scheduling visits at the end of the year if your deductible has already been met.

Premiums DO NOT count towards your deductible or max out-of-pocket.

A high versus low deductible

Comparing a health insurance plan with a low or $0 deductible versus a high one will really vary depending on each person — and what you can or cannot pay in premiums.

ou will want to consider both your health and financial comfort level. Anticipating a lot of healthcare costs in 2021? You should probably look for a lower deductible, higher coverage plan.

Do you feel healthy and not visit the doctors often? You might opt for a higher deductible plan with lower coverage and lower premiums. Always weigh in the possibility of unexpected costs and emergency visits.

A responsible personal finance planning move would be to make sure you have enough money saved to cover your deductible. Try to save an emergency fund or begin a Health Savings Account.

Having an amount set aside means avoiding a stack of medical debt if any unfortunate and expensive costs arise. Unfortunately, most people get on the cheaper plans with high deductibles because that is all they can afford.

Without adequate savings, healthcare can quickly become very expensive.

3. If Current Doctor’s are In-Network and if Current Prescriptions are Covered

Many people have been with their doctor for years and don’t want a new one if they switch insurance. If you are happy with your doctors or specialists and want to continue seeing them, include them in your search or your insurance application.

Not entering your doctors in your search means you could be moving out of their network. Going to an out-of-network doctor or specialist is typically more expensive than a doctor who is in-network.

f staying with your current doctors is a priority, make sure you are shopping plans within their network. Are you someone who sees multiple specialists and doesn’t want to get a referral from your primary doctor beforehand?

Then you should also be checking if referrals are needed when you are comparing plans. A (have to) referral is typically the difference between HMO (Health Maintenance Organization) plans and PPO (Preferred Provider Organization) plans, but options will vary state by state.

If you are taking any prescription drugs, you should be entering those drug names into your application and search too. Entering your prescriptions will give you an accurate estimate of what they would cost on a new plan.

You will also see what tier your prescription medications fall in. Make sure the drug copay is something you can afford if it’s something you need regularly.

4. Office visits and copays that work for your health needs

The next cost to consider when you are comparing health insurance plans is the copayment. Chances are you have been through a copay change in your own life. Or, you may have sat in the doctor’s waiting room and overheard what someone’s copay is. Or you’ve heard how some people seem to have none.

Your copay, or copayment, is the amount you’re responsible for paying when you make office visits or pick up prescriptions. The copay amount will depend on the type of insurance you have.

art of the Affordable Care Act was to ensure all plans have to include a free annual preventive visit with your primary doctor (which may or may not include a copay). Beyond that, the price of your visits could vary greatly.

Just like making sure your scripts are covered, you’ll also want to make sure you can comfortably afford the copay (there always IS one). There might be different copays when you visit your primary care doctor, specialists, emergency room, and urgent care.

Women will also want to compare the coverage and copays of OBGYN visits, prenatal, and postnatal care. If children are going to be on your plan now or in the near future, you should also check pediatric services. Compare the coverage and copays for these services as well!

Compare health insurance plan details in the summary of benefits.

Some of this information, like primary care visit copays, will probably be available on the main screen of your search when you are comparing plans on the marketplace.

To learn more about your coverage, you should be digging a little deeper into your plan details. I always recommend looking at and downloading the plan’s “summary of benefits.”

The summary of benefits will give you a lot of necessary information about the plan you’re considering. Don’t forget to save a copy to your files for the plan you end up choosing. Inside the summary of benefits, you will be able to see the copayment you’ll pay for each type of visit.

You will also see more details of what is included in your coverage. If you are in the family growing stage of your life, you will want to make sure you look at the “if you are pregnant” section, where you will see the cost of prenatal and postnatal visits and the cost of childbirth and delivery.

Make sure to also compare these costs against other companies when you are shopping for a new plan. One plan might look great on the outside (in terms of the premiums and deductibles displayed on the main screen), but it could be a whole different story when you look at the costs of the services you’ll be using.

It doesn’t hurt to download several summaries of benefits to make sure you get what you need.

5. Compare health insurance plans that are HSA compatible

The final consideration when you are comparing health insurance plans considers the Health Savings Account. An HSA, or Health Savings Account, is an unknown gem when you are shopping for insurance.

Certain high-deductible plans allow you to open an HSA, an investment account that is designated specifically for medical costs. Like a retirement or brokerage account, an HSA can be opened with an administrator or custodian, like Fidelity. Also, check with your bank.

You may also be able to open one at a local bank or credit union, but your investment options might be limited.

HSA tax perks

Beyond having a designated spot for having medical savings, there are also some nice tax-perks that come with an HSA. The first tax benefit is that contributions to your HSA are tax-deductible, meaning you will write them off at the end of the year.

The write-off is lowering your taxable income, meaning you will pay less in taxes. The second tax perk is that your invested money will grow tax-free. The third perk is that any withdrawals from this account for medical expenses are, again, tax-free.

If you have an HSA for 2021, you can put a maximum of $3,600 in this account as an individual or $7,200 as a family. Let’s see an example. Say you are self-employed and you make $50,000 for the year.

You are the only one on your health insurance plan, so you contribute the maximum amount of $3,600 over the year (or $300 per month). That amount gets deducted from your income when you do your taxes.

Not looking at any of your other tax considerations, your taxable income is now $46,450. This means you are not paying taxes on this $3,550.

Long-term growth

Once inside your HSA, you can invest your money, giving it the potential to grow with the stock market. You should be doing your research before investing or talk to a financial professional where your HSA is kept.

If your money grows 8% over the next year, your balance would be $3,844.65. That $294.65 of market gains is yours, tax-free. You can treat this as a medical emergency savings account and try to build your balance over the years.

The total balance in your account is eligible for tax-free withdrawals for qualified medical expenses at any time. This tax-free withdrawal is your third tax-benefit. Unlike a Flexible Spending Account or FSA, your HSA does not start over each year.

The account stays with you, regardless of your employer or employment. That means this account has the potential to get pretty big if you continuously fund it and allow it to grow.

Just remember, the money is only there for medical purposes, but don’t hesitate to use those funds if needed.

Pulling money out for non-medical expenses

Remember, these accounts are designed to help pay for medical costs to those who are on a high-deductible plan. If you pull your money out for non-medical expenses, you will have to pay income tax on the withdrawal and an additional 20% penalty.

Taking this HSA or FSA out for anything other than a qualified medical expense wipes out any tax benefits of this account. Make sure the money you are putting inside is not needed for other expenses or non-medical emergencies.

An interesting rule to keep in mind with the HSA is that 20% of a non-medical penalty falls off when you reach age 65.

without this extra tax, you can make withdrawals from your HSA just like you would a traditional IRA. You will still owe income tax on withdrawals, but you are still reaping the tax advantages of the tax-deferred growth inside the account.

People preparing for retirement should keep the HSA in mind as another potential source of retirement income.

Don’t let comparing insurance plans cause unnecessary stress.

There are many considerations, and it can be easy to get overwhelmed when you’re comparing insurance plans. Don’t let this prevent you from getting insured.

The tools and resources available on healthcare.gov make it easy to input your needs and compare plans. When you know what you’re looking for, your insurance enrollment will be much smoother.

If you want more tips on getting insurance as a business owner, check out this post. If you have been putting off enrolling in a health insurance plan or shopping for a new one, time is running out for 2020’s Annual Enrollment Period.

Even if you have active coverage, it is still worth taking a peek every year to make sure you are still paying a competitive rate and getting quality care.

You have until December 15th to make changes to your health insurance or enroll in a new plan. All changes will be effective on January 1st, 2021.