How small business owners could benefit from an annuity

Posted: 9th July 2021 08:10

No one can afford to simply live for today without thinking about the future. That is particularly true when it comes to maintaining financial stability from today until retirement. You see, there is no value in life if you have to accept a lower standard of living when your best earning years are behind you. The whole point of working hard is to earn the right to live in peace and prosperity when you reach your golden years.
As a small business owner, you might not have the same opportunities as your employees to save money. However, there are things you can and should be doing to set money aside for retirement. Have you ever thought about the ways you could benefit from purchasing an annuity? As an investment opportunity, an annuity is a solid investment option for entrepreneurs who may not be able to participate in an employer-sponsored 401K plan.
The information below is going to focus on defining an annuity and sharing with you how you could benefit from purchasing an annuity today.

What is an Annuity?

Let's start with a textbook definition of annuity as provided by the Investopedia website: "An annuity is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future."
In simpler terms, you would invest money with an insurance company and allow them to hold that money while you earn interesting it. At some agreed-upon point in the future, the insurance company would start paying you a monthly, quarterly, or annual amount one a prescribed period of time.
Note: Should you want to start receiving annuity payments immediately from the insurance company, you would be required to make a large one-time (upfront) payment.

The Benefits of Annuity Investing for Small Business owners

As we stated above, small business owners, you included, generally have fewer saving opportunities than their employees or employees who are working for other companies. An annuity is a viable option for anyone who likes the benefits they would receive from such an investment.
As a small business owner who feels obligated to invest for the future, doing so with an annuity investment does provide certain benefits. Let's look at a few of these benefits.

An Annuity is a Safe Investment

When you purchase an annuity from an insurance company, you are doing so based on the fact you believe the insurance company will still be in business when your last income payment is sent to you. As long as you purchase your annuity from a top insurance company, it's as about as secure as investing (saving) money through a top bank.
Essentially, the insurance company guarantees to return your principle with any earned interest based on what has been agreed upon in your annuity contract. It's equivalent to investing in a AAA bond, yet generally returns a higher rate of interest.

A Tax Deferred Investment

One of the great benefits of investing in an IRA or 401K account is the IRS allows investors to make said investments while deferring taxes until they actually take constructive receipt of the money. The IRS also offers the same tax-deferred status to qualified annuity investments.
If an annuity investment is tax-deferred, you would be allowed to deduct the amount of your payment or payments to the insurance company from pretax income. You would not be required to pay taxes on any of that money until you start receiving annuity payments. At that point, you would be obligated to pay taxes at your applicable tax rate on any portions you receive.

No Contribution Limits

While some tax-deferred investment options come with limitations on how much income you can defer each year, there are no such limitations on annuities. In other words, you can save as much as you want with the promise you will pay taxes on the tax-deferred money whenever you take payments or distributions.
By the way, the tax-deferred provision also applies to the interest you would earn from your annuity.

You Can Create an Income Stream

If you lack the discipline to control your money effectively and efficiently, investing in an annuity would be a great way to protect your money while providing you with a constant revenue stream starting at some point in the future. It would be the equivalent of you setting up your own employer pension fund or retirement plan.
The real value of an annuity is you get to decide how and when to start receiving payments. If you want a lump sum payment at some point in the future, you can do just that. If you decide to take monthly, quarterly, or annual payments, you get the option of deciding how much per payment and for how long. That kind of flexibility is perfect for someone in retirement.