Maybe you’ve recently maxed-out your 401k and your IRA, and you’re still looking for ways to save for
retirement and defer taxes.  If so, a relatively new tool on the market may help you meet your financial
goals. It’s called an Equity Indexed Annuity (EIA) and it’s gaining in popularity.

Equity indexed annuities take advantage of the security of annuities and potential market gains. They’ve
gained media attention as an insurance product that can profit from gains in market indexes. According
to USA Today, currently 41 companies offer a total of 131 equity indexed annuities.  The combination of
the security of an annuity and the potential growth of the stock market has led to an increase in the
amount of annuities purchased and also the amount of scrutiny given EIAs by the media and regulatory
groups.

Like a regular fixed annuity, you put money into an annuity in return for interest
and a steady stream of income after you’ve retired. Income guarantees are
based on the claims-paying ability of the insurance company. The difference
is that with an equity-indexed annuity you have the potential to earn more future
savings depending on the performance of the index to which it’s tied. Many
EIAs are based on the Standard & Poor’s 500 index.

One possible downside is that the insurance company with whom you contracted
for the annuity can set limits on the amount of market gain you actually receive.
While you still have an opportunity for adequate growth, it may not always be at
the same level as the index.

Insurance companies can limit your potential gains in several ways. For example,
they can put a cap on your growth. If they assign a 10% cap, and the market
increases 20%, you get only 10% of the gain. They can also give you only a
percentage share of the index performance. For example, if they set the rate
at 70% of index performance, and a particular index rose 10%, you would earn
7%. Finally, they can implement margins or spreads. If your margin was set at
4% and the market rose 10%, your annuity would rise only 6%.

How and when interest is credited to your EIA is an essential component as well.
Some EIAs calculate interest by comparing your account value at the beginning
of the year to its value at year end. Assuming a gain, the difference is added to
your account using the guidelines above. Others take the value of your EIA then
add the value gained after the entire term of the EIA which could be many years.

One of the biggest advantages of EIAs lies in taxes. Future income and earnings
in an annuity generally offer tax-deferred growth. This is especially helpful if you
expect to be in a lower tax-bracket during retirement.  

Keep in mind that EIAs are primarily a retirement savings vehicle and usually
have a penalty for early withdrawal. There is an additional 10% tax penalty if you
withdraw before age 59 1/2. However, many annuities have a provision that allows you to withdraw 10%
of your funds without paying a penalty. Withdrawals will reduce the amount paid to beneficiaries at the
time of death.

As with most investments, there is always risk, and you should consult carefully with a financial
professional before you choose to invest. As an alternative to traditional retirement savings, EIA’s may
be a viable option to help you plan for retirement.

This article was submitted by Robert Valentine of Financial and Retirement Management.Robert Valentine is a well-known expert in the matters concerning investors. His articles on financial planning matters that concern investors have been published by several publications throughout the United States.