Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. The US Small Business Administration (SBA) received funding and authority through the Act to modify existing loan programs and establish new loan programs to assist small businesses nationwide that were adversely impacted by COVID-19. One of these new loans, the Paycheck Protection Program (PPP), provides a direct incentive for small businesses to keep their workers on the payroll. Issued by the SBA, PPP loans will be forgiven if you adhere to strict guidelines.Read More
News and Events
The novel coronavirus (COVID-19) has shaken industries and economies across the world. If you’re like many small business owners right now, you are probably sitting in your home worrying non-stop about how your small business will make it through this crisis. The Coronavirus Aid, Relief, and Economic Security (CARES) Act allocates more than $2 trillion in support for individuals and businesses as they attempt to navigate this time, and several banks and financial institutions are offering relief as well.Read More
Lawhorn CPA Group’s top priority is the safety and well-being of our clients and team professionals.
With the new “safer at home” order in effect, please know that our business is considered essential, and we will remain open and working. However after careful review of information provided by the Centers for Disease Control and Prevention (CDC) and other state and federal organizations on the COVID-19 pandemic, we have determined it may be necessary for our offices to close periodically or operate with limited staff to protect the health of clients and employees.Read More
Annuity investments are a growing trend with financially savvy individuals who worry that Social Security and company pension plans won’t be enough to fully support their retirement fully. Fears that social security will one day run out coupled with the overall decrease in pension fund participation in America have compounded the interest in annuities (pun intended). At Lawhorn CPA Group, we work with business owners, as well as, employees, to maximize tax deferrals while promoting accumulation of wealth and retirement income. Annuities play a vital role in some individual portfolios, but for those of you considering investing in an annuity, we’ve compiled answers to some common critical questions. Whether you’re just beginning to plan for your retirement or are needing a supplement to your current retirement income, this article should help you answer the question, “Is an annuity investment right for me?”
What is an Annuity?
Odds are you have heard of an annuity before, but very few Americans understand what they are and how they work. Annuities are kind of like a life insurance policy that pays you during your retirement (after age 59 ½). An annuity is a financial product offered primarily by insurance companies and represents a contract between you and the insurance company. In short, buying an annuity is a long-term investment to offer you income in regular payments to support your estate planning and retirement income goals. Annuities are purchased with after-tax dollars with no taxes due on earnings until you make a withdrawal, deeming them tax-deferred investments. It’s important to note here that if you do withdraw money from an annuity before you turn 59 ½, you may be subject to a 10% early withdrawal penalty.
Benefits of an Annuity
Annuities are unique investments in that they offer benefits that aren’t found with other retirement savings plans. One of the primary benefits of an annuity is that they provide tax-deferred earnings without contribution limits or minimum distributions. Additionally, annuities offer individuals tax control, guaranteed death benefits, and lifetime income options. Because you choose when to withdrawal funds, annuities provide you with improved tax control.
The death benefits offered by this form of investment are unique to annuities. Death benefits offer your chosen beneficiary a guaranteed benefit if the contract owner dies unexpectedly. This guaranteed benefit includes the amount of principal minus any withdrawals or the current account value. So, if a client invests $75,000 and passes away four years later when the account value is $145,000, the beneficiary will receive the full $145,000. Another advantage of an annuity where death benefits are concerned is that even if the account value has decreased, the beneficiary is entitled to the original cost of the account. Let’s say our previous example client investment of $75,000 drops to $50,000; the beneficiary will still receive $75,000.
Finally, another benefit of annuities is their lifetime income options, which are also unique to this form of investment. Annuity lifetime income options offer a pension-like payout that prevents retirees from outliving their assets. Payout plans for annuities vary, but some of the more common include, a single life payout, a joint and survivor payout, a period-certain payout, and the life with an installment payout.
Types of Annuities
Annuities come in several different types based on your investment goals. A financial advisory firm can help you decide which plan best fits your desired income options. Generally, you have four primary types of annuities to choose from, including a variable annuity, a fixed annuity, an immediate annuity, and a fixed indexed annuity.
Variable Annuity: A variable annuity holds the possibility of both more risk and more earnings. Operating like an Exchange Traded Fund (ETF) or mutual fund, variable annuities allow you to select a portfolio of accounts (sometimes called subaccounts) that you want to fund your account. Payouts for a variable annuity are based on how well those funds perform in the marketplace. The investment and principle value in a variable annuity fluctuate. Assuming no withdrawals are made, the total account value of your annuity could swing widely. The guaranteed death benefit will pay out either the original principal or the highest anniversary value, whichever is greater.
Fixed Annuity: Fixed annuities are very similar to a savings account. A fixed annuity grows your investment based on a guaranteed rate of return. With a fixed annuity, you pay a lump sum and in return the insurance company promises to credit you a stated rate of interest for a specified period.
Fixed annuities are fitting investment vehicles for more risk-averse individuals, as they offer a principal and interest payment regardless of the current market, as long as the annuity is held during the guarantee period (sometimes referred to as a surrender-charge period). Guarantee periods can last from one to ten years with a higher rate of interest being paid for longer guarantee periods. It’s important to note that while fixed annuities are comparable to a savings account, they are not insured by the FDIC or backed by the US Government.
Immediate Annuity: An immediate annuity, as the name suggests, converts a lump sum of money into an immediate stream of income. Each payment that the insurance company makes to you is a partial return of principal and part earnings, which means the principal portion of the insurance payout is excluded from income tax. Most immediate annuities are structured as fixed payments; however, some insurance companies also offer immediate variable annuities as well.
Fixed Indexed Annuity: A fixed indexed annuity offers the potential for increased earnings based on an index’s growth (think S&P 500), but also includes downside protection. This means that your fixed indexed annuity’s principal investment will not decline if the index performs poorly, protecting your principal no matter what the index does. There is also more opportunity for growth versus a fixed annuity and less risk, although your potential return value is even lower than with a regular fixed annuity. It’s important to understand that your fixed indexed annuity’s performance isn’t based on the index itself but rather on the underlying index performance.
Why Buy an Annuity?
Retirement planners and financial advisory firms generally recommend annuities to members of the baby boomer generation and younger boomers who are helping their older parents with investment choices. Usually, younger people are less risk-averse, as they have more time to make up any loses and don’t find annuities as attractive compared to other investment vehicles. Alternatively, individuals who are closer to retirement are more willing to sacrifice some gains in exchange for the security of guaranteed payments. Because annuities provide gains typically higher than your normal certificate of deposit but with less risk than an EFT, they are more popular with adults in the later seasons of their “earning years.”
Therefore, the question, “should you buy an annuity,” can only be answered after you’ve created a financial plan. Once you have your financial goals in place and begin obtaining quotes on annuities from insurance companies, some essential factors that you should be aware of are the surrender fees (when you withdraw money early or cancel the annuity), churning, and buybacks. An advisable strategy to purchasing an annuity is to collect your quotes and bring this paperwork to a Financial Advisory Specialist or Certified Public Accountant to help explain the term of the agreement in full.
Financial Advisory Help with Annuities
When planning for your financial future, it’s more important than ever to find an investment vehicle that helps you avoid loses and provide reliable income in times of market volatility. Depending on your investment goals, this may make annuities right for you. Lawhorn CPA Group’s client chooses us to help them navigate the complex and often confusing path to tax-deferred retirement savings during shifting market conditions. Contact us online or at (865) 212-4867 to gain access to a value-priced financial consultant, that will navigate you to a robust financial finish and comfortable retirement.
If you have access to the outside world at all, you are probably fully aware of the coronavirus that has been sweeping the world. In an effort to keep you informed, we’ve gathered some information on what this could mean for this tax filing season and what we’re doing to prepare.Read More
One of the most famous axioms that individuals hear when discussing wealth is that “you can’t take it with you when you go.” This adage could be considered the primary ethos behind the process of estate planning. Estate planning is the preparation for the distribution of an individual’s assets and real and personal property upon their death. At the heart of estate planning lies the formal creation of a will, which includes naming an executor. An executor of an estate is an individual tasked with locating and assembling the assets of an individual’s estate. In this article, we’ll further explore the executor of an estate, including executor responsibilities and duties.
“Planning is bringing the future into the present so that you can do something about it now.” ~ Alan Lakein
Tax planning is a concept which has become a more prevalent topic in American’s lexicon since the passage of the Tax Cuts and Jobs Act, which became law in December of 2017. Tax planning is the analysis of your financial situation from a tax perspective and has several beneficial advantages that can help you leverage tax benefits, preserve investment returns, structure charitable donations, protect and secure financial support for dependents, and prepare for a secure retirement. If you’re looking to reduce your taxes or increase your tax refund for 2020, here are some tax planning basics to follow.
Monopoly has been a favorite board game among kids for over 80 years. Most kids like the game because they get to make money, but what they do not realize is they are also learning valuable personal finance lessons that can help them in the future. Here are the top six personal finance lessons that can be learned from playing Monopoly.
We are 113 days until 2020. If you’re wondering where 2019 went, we are right there with you. As the 2018 tax extension deadline approaches on October 15, 2019, we know you are most likely not considering filing your 2019 tax return yet. But maybe we all should be. With many new updates to tax laws and the final implementation to steps of the Tax Cuts and Jobs Act, it is easy to be unsure of how these changes are going to affect you. We are here to walk you through some anticipated challenges for the 2020 tax season.
Before anything can be sold in the marketplace, you need to formulate a price for that product or service. For nearly the entire history of capitalism, decision-makers have chosen one of two pricing strategies, often without knowing what pricing strategy they are actually using. These two pricing processes are the cost-based approach, where a price is formulated from its overall cost of production (plus a markup), and the competitor based approach, where a price is created based on what other market participants are charging (or maybe a little less than they are charging if you’re a new competitor).