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Traditional Fixed Annuity Accounts

Jan. 19, 2011 1:52 PM ET
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Presently interest rates remain at historical lows and this affects all fixed income investment instruments like bonds, government treasuries, bank certificates of deposit, money market accounts, and fixed annuities.

Fixed annuity rates are mainly determined by the movement in government treasuries and highly rated corporate bonds as these are two of the main components purchased by insurance companies as part of their overall portfolios.

When treasury rates and bond returns are low, fixed annuity rates will fall in kind - a low tide floats all boats.  However, fixed annuities are crediting higher returns than most bank instruments.

Conservative investors who are thinking of investing in a fixed annuity or who own one that is soon to mature may find themselves in a difficult position.  As annuities are usually longer term in nature, there is a risk of locking in a fixed rate that may not be competitive in the future.

Economic conditions around the world seem to to be improving and inflation appears to be on the horizon.  Interest rates tend to increase during these periods of time.

Short Term Fixed Annuity Accounts

One option is to buy time through the purchase of a short term annuity and wait until overall interest rates inevitably increase.  This might be a good idea for those who have a tax deferred, non-qualified annuity that is near or at maturity.
In order to maintain the tax deferred status of the account, the annuitant can perform a 1035 tax-free exchange and move their pre-tax gains to a new account with a short maturity.  This will eliminate a taxable gain on any part of the asset.

For those who are simply looking for something safe with a shorter duration, they can purchase a one, two, or three year fixed annuity and consider something with a longer duration once the account has reached maturity.

The overall goal for most fixed income investors is to lock in a satisfactory yield for a suitable period of time and either defer or live off the income.  Current interest rates may be too low to consider a long term annuity, thus a short term account can be a reliable investment while waiting for better fixed yields and returns.

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