Investments 101

Understanding all your options can be important to making a smart decision. As a potential investor, are you comfortable with your knowledge of the basic types of investments available to you?

Annuities

An annuity is an insurance contract that may provide regular periodic payments for a specified period of time in exchange for your premium payment. Features of annuities include:

• Tax-deferred growth potential – Earnings generally aren’t taxed until withdrawals from the contract begin.
• Minimum death benefits – Provides potential payout to beneficiaries after death.
• Flexible premium options – Allows investment of a lump sum or periodic payments.
• Guaranteed minimum income (optional) – Includes choice of “payment for life,” which provides monthly payments beyond the years of the predicted annuity phase.

Note with guaranteed minimum income option, if the insured dies prior to the end of the annuity phase, the account value at time of death may affect the value of the death benefit. All guarantees with annuities are based on the claims-paying ability of the issuing company.

Annuities are available with a wide range of options and possibilities, each serving different purposes for different types of investors. Fixed annuities, for example, offer investments with a guaranteed rate of interest for a specified time period; while variable annuities, which are subject to market risk, typically offer a range of investment options, allowing you to be more aggressive or conservative. An annuity offers options under an insurance contract which includes mortality and expense risk charges as well as providing for lifetime payments.

An annuity is a long term investment designed for retirement purposes. Early withdrawals may be subject to a deferred sales charge and if taken prior to age 59½, an IRS 10% premature distribution penalty tax may apply. Money distributed from an annuity will be taxed as ordinary income in the year the money is received.

IRAs and other qualified plans already provide tax deferral like that provided by an annuity. For a cost, annuities provide other features and benefits such as contract guarantees, death benefits or lifetime income. If other options are available, you should not purchase a qualified annuity unless you want these additional features and benefits taking into account their cost.

Employer-sponsored retirement plans

Employer-sponsored retirement plans are commonly known as 401(k), 403(b) or 457(b) Deferred Compensation plans (depending on the type of employer). If you are still working and participate in such a plan, the features may include:

• Pre-tax contributions – You’re only taxed on the amount left in your paycheck after your contribution — so you’re paying less in current taxes.
• Tax-deferred growth potential – Your earnings and contributions generally aren’t taxed until you withdraw from the plan, so your earnings have the potential to grow tax-deferred.
• After-tax contributions – Some plans may offer you the ability to invest after-tax dollars in the plan through a Roth feature. As long as you meet certain requirements for a qualified distribution, including a five-year holding period, your earnings on those dollars can be withdrawn tax-free.
• Paycheck deductions – Allows contributions to the plan to be automatically deducted from your paycheck, so that you would be putting a percentage of your gross pay into an account.

Employer-sponsored retirement plans typically offer different investment options. With some plans, your employer may match a percentage of what you contribute to the plan — adding to your savings. Note that early withdrawals are generally permitted from most plans; however, a penalty is usually involved, as well as ordinary income taxes.

IRAs

An IRA, or Individual Retirement Account, is similar to an employer retirement plan, but you set it up for yourself. Typical features of an IRA include:

• Tax-deferred growth potential – Pay no current income taxes on your investment earnings until you withdraw.
• Pre-tax contributions – Deduct contributions from your annual income, reducing the amount you owe in current taxes (depends on your employment situation).
• After-tax contributions – A Roth IRA offers you the ability to invest after-tax dollars. If you meet certain requirements for a qualified distribution, including a five-year holding period, your earnings on those dollars can be withdrawn tax-free.
• Investment options – Many IRAs offer a range of investment options. IRAs come in many forms, with different features, benefits and contribution limits. Options for transferring an employer retirement plan into an IRA are available as well.

Mutual funds

A mutual fund is an investment vehicle managed by a professional money manager that allows a group of investors to pool their money together with a predetermined objective. Mutual funds range from conservative investments, such as money market funds, to those that invest in more aggressive options, such as new technologies and emerging markets. Among the features of mutual funds are:

• Professional money management – Provides professional expertise while requiring less personal commitment of time compared to investing in individual stocks or other securities.

• Automatic diversification and asset allocation – Helps reduce portfolio risk by ensuring your money remains spread among a variety of investments and different asset classes consistent with the fund’s stated goals.

  Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss in declining markets.

• Range of investment options – Allows you to choose a fund according to your specific investment goals and risk tolerance.

Government bonds

A government bond is an investment guaranteed by the U.S. government (the issuer) and typically held for 10 to 30 years. When held to maturity, they offer value of principal and a fixed rate of return, which varies depending on the type of bond purchased.

The return and principal value of investing in a stock mutual fund or variable annuity funding option fluctuates with changes in market conditions. Stocks may offer greater growth potential in comparison to bonds, but carry more risk. The principal value of a bond varies inversely to the rise and decline of interest rates. Bonds typically offer a fixed rate of return, if held to maturity. However, bonds may contain a call feature that may be exercised prior to maturity.

Certificate of Deposit (CD)

A CD is a savings vehicle offering a fixed rate of return (like a government bond), but can be purchased from banks, which means it is FDIC-insured. When your investment matures (either in months or years, depending on the CD you purchase), you can cash in the CD and receive its face value, plus the interest.

Bank certificates of deposit are FDIC-insured up to applicable limits and offer a fixed rate of return. [Variable annuity returns/mutual fund yields] and principal will fluctuate with market conditions.