Annuities and Securities for Individuals and Businesses

Annuities (Retirement Planning)


Retirement Planning

Retirement Planning

Many people have not been diligent about developing sound retirement savings plans, despite the fact that most individuals cite having sufficient funds in retirement as an important concern. Retirement is often viewed as a distant point in the future. As such, people find it easy to procrastinate the goal of retirement in favor of current financial demands: a new home, college educations for the children, vacations, medical expenses, a new car, or daily living expenses. Yet the reality is that retirement planning cannot be reserved for tomorrow or perceived as optional, nor can it consist of putting aside the dollars that remain after all other obligations have been paid for. Rather, retirement planning takes a conscientious and strategic effort to reach one’s savings goals.

There are several types of retirement plans available that can help you accumulate the funds you will eventually need. Recognizing the importance of retirement planning, the federal government offers significant tax benefits for certain types of retirement plans. The plans that qualify for these important tax advantages are referred to generally as “qualified plans.”

Retirement Plans for Small Employers

Employers of small companies have their own set of retirement plan options. They can use these plans to establish their own tax-deferred retirement plans. Specifically, the most common of these plans are SIMPLE plans, SEP plans, Keogh plans, and solo 401(k) plans.


The Savings Incentive Match Plan for Employees (SIMPLE) was introduced in 1997 specifically for certain small employers. A SIMPLE plan can be set up to operate as a 401(k) plan or as individual IRA plans. From an employee’s perspective, a SIMPLE IRA or SIMPLE 401(k) works much like a traditional 401(k), although with a few restrictions. First, the employer must have no more than 100 employees earning at least $5,000 from the employer in the preceding year. Employees can contribute up to $12,500 or 100 percent of their total compensation each year, whichever is less. (The $12,500 limit was as of 2017 and is indexed for inflation). Participating employees who are age 50 or older can elect to make additional catch-up contributions—that is, contributions of more than the specified annual limit—up to $3,000 (as of 2017). All contributions made to a SIMPLE plan vest immediately. In other words, participating employees are 100 percent vested in the amounts in their plans, regardless of the source of the contribution (employer vs. employee) and regardless of the kind of SIMPLE plan (SIMPLE IRA vs. SIMPLE 401(k)). Withdrawals from the plan will be subject to a 10 percent penalty if made before the employee reaches age 59½, unless an exception applies. However, the penalty increases to 25 percent if withdrawals are made within the first two years of the date the employee first participated in the plan.

Simplified Employee Pension Plans

Simplified employee pension plans (SEPs) are also designed for small employers or self-employed individuals. Under a SEP, an account is set up for each employee and the employer then makes contributions to the participant’s IRA according to a formula established in the plan. The maximum yearly contribution to a SEP is 25 percent of the employee/participant’s compensation or $54,000 (2017, as indexed for inflation), whichever is less. Contributions are tax deductible for the employer and are not currently taxable to the employee.

Keogh Plans

Keogh plans are designed for self-employed individuals, which includes sole proprietors, business partners and self-employed professionals such as doctors, lawyers, or independent agents. Individuals can participate in a Keogh plan if they are covered under another company retirement plan and self-employed in another capacity. Contributions for 2017 are limited to the lesser of $54,000 or 100 percent of the employee’s compensation. Contributions to a Keogh plan are not taxed as current income and grow tax deferred.

Solo 401(k) Plans

Another option for the small business owner is the solo 401(k), otherwise known as the individual 401(k). These plans, as the name implies, are reserved for businesses in which the owner, business partner, and the owner/partners’ spouses are the only employees. They might be appropriate for sole practitioner professionals, small retail owners, freelance contractors, individual consultants, and the like. One of the primary benefits to a solo 401(k) is the amount that can be contributed, which may be higher than allowed with other types of plans. Contribution levels are “split” between the amount that the business owner is permitted to contribute as elective deferrals and the amount that the business is permitted to contribute on the owner’s behalf as profit sharing. As of 2017, the business owner as an employee was permitted to defer up to 100 percent of his or her income, or $18,000 (whichever is less) to such a plan. (Those who are age 50 and older may also take advantage of the additional catch-up contribution). The business as the employer is permitted to make deductible contributions of up to 25 percent of the owner’s income, or $54,000 (whichever is less). (As of 2017, the combined contributions may not exceed $54,000). The larger contribution is available because the compensation deferred by the employee does not count toward the 25 percent limit. A solo 401(k) can be established as a regular 401(k), in which case contributions are deductible and earnings grow tax deferred. It can also be established as a Roth 401(k), in which case employee deferrals are not deductible, but earnings can be taken tax free, so long as the account is held five years or longer and the owner is at least age 59½.

Individual Retirement Accounts An individual retirement account (IRA) is a tax-advantaged personal retirement account that allows a person to contribute funds for his or her own retirement. The account may be set up as a:

  • Traditional IRA
  • Roth IRA

Traditional IRAs

The traditional IRA is an individual tax-favored account that allows contributions to be made on either a tax-deductible or non-tax-deductible basis. Earnings grow tax deferred while they remain in the account; when withdrawn, any contributions that were previously deducted and the earnings that grew tax free become subject to taxation at ordinary income tax rates. To the extent a traditional IRA holds any contributions that were not deducted when they were made, these contributions will be received tax free upon withdrawal. In 2017, the contribution limit was $5,500. Plan participants over age 50 could make “catch-up” contributions of an additional $1,000 in 2017. Although any person with earned income can contribute to a traditional IRA, the contribution may or may not be tax deductible, depending on whether the individual is an active participant in an employer-sponsored qualified retirement plan and, if so, his or her adjusted gross income. Thus, whether a person can make a fully deductible traditional IRA contribution depends on the answer to this question: Is the participant or the participant’s spouse covered by an employer-maintained retirement plan? If the answer is no, then the contributions are fully deductible up to the specified limit, no matter what the person’s adjusted gross income. If a person or his or her spouse is covered by an employer plan, then the contribution is fully deductible so long as the person’s adjusted gross income does not exceed the following threshold levels in 2017:

  • $62,000 for single individuals
  • $99,000 for married couples filing jointly

If an active participant’s income exceeds these levels, the deductibility of IRA contributions is phased out and eliminated once income reaches $72,000 for a single individual and $119,000 for a married couple filing jointly in 2017.

Roth IRAs

A Roth IRA is a more recent form of IRA, and functions as a traditional IRA except in two areas:

  • Roth IRA contributions are made with after-tax dollars, which means that contributions are not deductible from gross income.
  • When qualified distributions are taken from a Roth IRA, they are tax free. A qualified distribution from a Roth IRA is any distribution made after a person has owned the Roth IRA for at least five years and meets one of the following requirements:
    • It is made after the individual attains age 59½.
    • It is made to a beneficiary on or after the individual’s death.
    • It is attributable to the individual’s disability.
    • It is a qualified first-time homebuyer distribution.

Roth IRAs also impose one limit on eligibility, which is based on a person’s income. The eligibility of married persons filing jointly to contribute to a Roth IRA is phased out if their AGI exceeds $186,000 and is eliminated if it is $196,000 or more (2017). Similarly, a single person’s eligibility to make Roth IRA contributions begins to be phased out once the individual’s AGI reaches $118,000 and is eliminated entirely once it exceeds $133,000 (2017).


A rollover is a transfer of money from a qualified retirement plan or IRA to a different plan or IRA. There are specific rules for “rollovers,” which are designed to discourage the use of plan funds for any purpose other than retirement income. Rollovers between IRAs, other than trustee-to-trustee rollovers (known as “direct” rollovers or transfers), can be made only once in any 12-month period. With an indirect rollover, the plan participant personally receives the funds and then has 60 days from the date the funds were distributed to roll them over to another qualified plan or IRA. Any distributed funds that are not “rolled over,” other than contributions to a Roth account or Roth IRA, will be subject to taxes.

Individuals changing jobs may also roll over any distributions from the plans with their former employers, or the same tax penalties just mentioned will apply. Amounts received from one qualified plan can also be transferred directly to another qualified plan, provided the new employer’s plan accepts such amounts. Rollovers must be made directly to the new plan, or they will be subject to a 20 percent withholding to pay taxes due. To avoid this withholding requirement, the rollover must be made without the funds ever being in the control of the plan participant.


Annuities offer a benefit that is not available in any other investment product: an income that cannot be outlived. With other types of investments, funds can be depleted and a person may be left with no remaining resources. In fact, the fear of outliving one’s assets is one of the principal concerns voiced by individuals who are retired or nearing retirement.

An annuity is a contract between an insurance company and an annuity contract owner. The contract owner normally pays the premiums for the annuity and possesses all the normal rights incident to property ownership. The annuitant is the natural person whose life serves as the measure for making periodic payments under a life annuity and to whom the payments will be made. In the overwhelming majority of annuities, the contract owner and the annuitant are the same person.

Annuities often have joint annuitants—two individuals, such as a husband and wife—and structure the annuity income so that payments are made for as long as either lives. An annuity that pays out to a single person is a “single life annuity;” an annuity that structures payouts over the lives of two people is a “joint life annuity.” The principal purpose of an annuity is to provide a stream of income through periodic payments to an annuitant.

An annuity may be:

  • Immediate annuity
  • Deferred annuity

Immediate Annuity

An immediate annuity requires the payment of a single lump-sum premium upon contract purchase, and periodic payments begin one payment period after the annuity is purchased. Since periodic payments under an annuity contract may be payable monthly, quarterly, semi-annually, or annually, the first periodic payment under an immediate annuity is payable within one year after the annuity is purchased. These payments are configured to last so long as the owner wishes: for a set number of years, for the duration of the owner’s lifetime, or for the duration of the joint lifetimes of the owner and another, such as a spouse. An immediate annuity contract is simply a mechanism for converting a lump sum into a series of periodic income payments.

Deferred Annuity

A deferred annuity is an annuity contract that—in addition to providing for periodic payments similar to an immediate annuity—also provides for the accumulation of tax-deferred cash value that is annuitized on a date in the future known as the annuity starting date. The annuity starting date in a deferred annuity is more than one year following the purchase of the deferred annuity. Thus, the periodic payments in a deferred annuity are deferred until a future date.