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What is a fixed-rate annuity?

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A fixed rate annuity is an investment with an interest rate established for a defined period that is not taxable until funds are withdrawn. Investors, often retirees, establish planned monthly payouts, creating a reliable supplement to other income for a relatively low starting investment, typically $1,000 to $10,000.

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With a minimum assured rate of interest for an established period of one to 10 years, the investor is not subject to market variability. Fixed rate annuities also offer a death benefit, with an attached fee, allowing the annuity to pass to the beneficiary without going through probate.

If the interest rate drops at the end of the agreed to period, removing funds early (usually before seven years) from this type of annuity can have steep fees attached. In addition, fixed payouts originally adequate to meet the investor's needs, may lose value over time due to inflation. Payouts are taxed as income rather than long-term capital gains, and if funds are withdrawn before the investor reaches the age of 59 1/2, a 10 percent penalty, in addition to income tax, is charged.

Fixed rate annuities benefit the person concerned with living beyond what his savings can support or who is in the 25 percent tax bracket and won't need to access the funds before age 59 1/2.

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