Investing in the stock market is essential when you are building your retirement assets. After all, the stock market historically has offered the best average returns on your investment, even with the downside risk. However, once you near retirement, the market’s volatility begins to look less attractive because you have less time to recover from a downturn. An equity indexed annuity is a hybrid product that combines the safety of a traditional fixed annuity with the upside earnings potential of the stock market, with the added bonus of being tax deferred until withdrawal.

When you purchase an equity indexed annuity, you enter into an agreement with the issuing insurance company. In return for your premium deposit, the insurance company agrees to do two things. First of all, you are guaranteed a minimum interest rate. Unlike investing directly in the market, you will never lose any of your original deposit or credited interest earnings. The only varying aspect of your equity indexed annuity is your yearly returns. Second, the interest rate that you are paid on your annuity is tied to a particular stock market index, such as S&P 500.

Because your annuity is never directly invested in the stock market, it may be a little confusing as to how your interest earnings are calculated. Simply put, the issuing insurance company uses the stock market index as a barometer to determine your interest earnings for each contract year. There are a few different methods that insurance companies use to arrive at this amount; a common method is called point-to-point. Point-to-point is based on the percentage change between the index’s value at the end of a crediting period (usually each policy anniversary date) and the beginning of the crediting period. Your interest earnings are then added to your annuity value after each crediting period transpires.

While being a great way to safely reap market gains, an equity indexed annuity also offers tax-deferral. Unlike traditional investment earnings, which are subjected to capital gains taxes at the end of each year, your interest earnings from an equity indexed annuity are tax deferred until you take them out of the annuity, at which time they will be subject to ordinary income taxes.

Does an equity indexed annuity sound like a product that you would be interested in? If so, then visit the AnnuityLibrary.com web site or call the Annuity Specialists at 1-800-998-4056.