An important advantage of a fixed index annuity is the range of guarantees and optional protection benefits available. These benefits allow you to transfer risk to the insurance company issuing the fixed index annuity. These guarantees help protect your assets, your retirement income, and your beneficiaries. In exchange for the risk transfer, the benefits may carry an additional cost that will vary by product and company.
You generally have two choices for receiving income payments: annuitization payments or income withdrawals. Each of these payment types is taxed differently. For annuities that are not held in a qualified plan, such as an IRA or a 401(k), part of each annuitization payment is a tax-free return of what you paid for the annuity and part is taxable as interest you earned on the annuity. On the other hand, income withdrawals under the same annuity are fully taxable until the interest you earned has been taxed. Then you withdraw what you paid for the annuity tax-free. It’s always a good idea to consult with your tax advisor before choosing between annuitization payments and income withdrawals.