This booklet is for informational purposes only. It is not intended to provide tax or legal advice.
Speak to a qualiﬁed tax advisor or attorney regarding your personal circumstances.
THE ROLE ANNUITIES CAN PLAY
Fixed Index Annuity
The ﬁxed index annuity combines tax deferral
and the potential for interest based on positive
changes of an external index without actual
participation in the market.
A ﬁxed index annuity may oer a choice of
indexes. The insurance company uses a crediting
method to track the performance of the index(es)
during a speciﬁed time period, which is typically
one contract year but could be multiple contract
years. At the end of each time period, the
company calculates the indexed interest. If the
result is positive, the annuity is credited interest
up to a predetermined amount. If the result is
negative, nothing happens, and the annuity’s
value doesn’t decline. In addition to potential
indexed interest, you may also have the option to
receive ﬁxed interest.
Like a traditional ﬁxed annuity, under current
federal income tax law, any interest earned in
a ﬁxed index annuity is tax-deferred until you
begin receiving money from your contract. If
you purchase a ﬁxed index annuity with after-
tax dollars, you will only pay ordinary income
taxes on your interest earnings (not on premium
payments) when you begin withdrawing money.
Purchasing an annuity inside a qualiﬁed plan
(retirement plan) that provides a tax deferral
under the Internal Revenue Code provides no
additional tax beneﬁts. An annuity used to fund
a tax qualiﬁed retirement plan should be selected
based on features other than the tax deferral. All
of the annuity’s features, risks, limitations and
costs should be considered prior to purchasing
an annuity inside a qualiﬁed retirement plan.
Some ﬁxed index annuities allow you to withdraw
credited interest without penalty up to a certain
amount each year. However, withdrawals will
reduce the contract value and the value of any
protection beneﬁts. Be aware that withdrawals in
excess of the “free” amount each year and during
the contract’s surrender charge period may incur
a surrender charge.
Most ﬁxed index annuities have components
that help determine how much interest can be
credited in a given year. The most common are:
• Participation Rate. A participation rate
determines what percentage of the index
increase is used to calculate your indexed
interest. For example, if the insurance
company sets the participation rate at 80
percent, your ﬁxed index annuity will be
credited with interest based on 80 percent
of any increase in the value of the external
• Spread. The spread is a percentage that is
subtracted from any increase in the value
of the index during the term period. For
example, if the annuity has a 4 percent
spread and the index increases 10 percent,
then the annuity would be credited 6
• Interest Rate Cap. Some ﬁxed index
annuities set a maximum interest rate
(or cap) that the contract can earn in a
speciﬁed period. If the index increase
exceeds the cap, the cap is used to
calculate the credited interest.
A ﬁxed index annuity is designed to provide
a combination of beneﬁts that can give you
conﬁdence in your retirement income strategy.
Whether the market is up, down or ﬂat, the
ﬁxed index annuity provides protection of your
principal and any credited interest from possible
market downturns and the potential for interest
linked to the performance of a market index. As
long as you abide by the terms of the contract,
your principal is protected against market loss
and any credited interest is locked in at the end
of each term period and cannot be taken away as
a result of a future market downturn.