— Bear Bryant

 The Advisor Insights question and answers can be found on Investopedia here.

Question Headline:

What is an annuity?

Answer: 

An annuity is a sum of cash invested to produce a flow of money for a fixed period. To simplify, an annuity is money invested with an agent or broker, that grows over time. The owner of the annuity will receive payments from the annuity company for a period of time, typically for life. There are two types of annuities, immediate or deferred annuities. An immediate annuity is when someone makes an initial  principle payment and begins receiving a fixed payment for life, immediately. With a deferred annuity, the investor doesn’t start receiving payments until a later, specified date, determined by the investor.  Annuities are tax deferred, making this investing vehicle important for people looking to save for retirement. There is often a conflict of interest between investors and agents concerning annuities. Agents/brokers selling annuities are paid commission at the point of sale, which tends to encourage the agent to sell annuities even if they are not appropriate for the investor. The lack of liquidity is also a downfall. If people are in a bind for money and their money is in an annuity, they could face penalties for having to withdraw their money early. Annuities are taxed at the ordinary income tax rate, and not the lower long-term capital gains rate like most investments. In summary, there are unique situations where annuities can be useful, however in most circumstances there are better investment options which provide better returns and more liquidity to investors.

– Wyatt Swartz

– Contributions by Caitlin Lammers

– 7/19/2017

The Advisor Insights question and answers can be found on Investopedia here.

Question Headline:

What’s the difference between a 401(k) and a pension plan?

Answer:

A 401(k) and a pension plan are both retirement plans set up between an employee and employer. The main difference is that a 401(k) is a defined-contribution plan, while a pension plan is a defined-benefit plan. What does this mean? A defined-contribution plan means that the amount of money in the 401(k) is dependent on how much the employee contributions to the plan, and the performance of the investment vehicles. These plans are tax deferred, and employees have an $18,000 contribution limit, unless they are 50 years or older. The employer is not required to contribute to a 401(k) plan, however they often do match a percentage of what the employee invests into the plan. With a defined-benefit plan, the employer is required to provide a specific amount of money to the employee once they begin retirement. This amount is fixed, and independent of how the investment vehicle performs. There are number of factors that determine what the fixed dollar amount owed to the employee upon retirement is. Employees can contribute to these plans as well. Pension plans are also tax deferred, and provide a tax break for employers when contributing.

– Wyatt Swartz

– Contributions by Caitlin Lammers

– 7/3/2017