If you have been awarded a large monetary settlement due to injury or malpractice, deciding how to invest or accept the funds can be a daunting task. Oftentimes, recipients will receive their court awarded funds in more than one way, but the use of a structured settlement annuity account offers several advantages when utilized in the transaction.
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Structured Settlement Annuity Accounts Avoid Income Taxes
The most significant advantage an annuity account has over all other forms of settlement options is that future payments avoid income taxes. It is a common misconception when investing in an annuity that offers periodic payments, the insurance company only disperses the principal over time. This is incorrect.
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In fact, structured annuities pay interest and principal to the insured each payment cycle. It does not matter how and when you receive payments, the interest generated by the internal return of the annuity is not considered taxable income by the I.R.S.
This is in stark contrast to any other means of receiving settlement dollars. Should you opt for a lump sum payment, no part of the lump sum would be taxable. However, when those same dollars are invested in a money market account, mutual fund, traditional deferred annuity, stock or bond account, then all gains would be subject to income and/or capital gains taxes.
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This means that any other investment would need to create larger returns than a structured annuity to account for the loss due to income taxes. If both accounts were yielding 5%, you would have less take-home spending dollars with the lump sum investment due to the taxes owed to all levels of government.
Structured Settlement Annuities for Future Needs
Annuities are commonly used as part of a structured settlement not only to avoid income taxes, but also because they provide reliable income in the future. A serious problem with lump sum payouts is dissipation. Too often the recipient will aggressively spend through their court awarded damages in the first few years and be left with very little in the future when it may be needed most.
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In other cases, poorly performing investments can quickly erode a lump sum settlement leaving less funds to generate income or to withdraw for living expenses. The stock market has witnessed precipitous loss of value twice over the last decade. Lump sum structured settlement awards, retirement accounts and discretionary investments alike can all lose significant value should the markets fall again.
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In contrast, fixed annuity accounts are not subject to market fluctuations and will not decrease when the overall markets are declining. Additionally, the systematic payments will be credited on a regular and agreed upon basis helping to prevent the insured from spending their award too quickly.
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In summary, a structured settlement annuity account is usually a wise choice for at least part of the funds received as a result of litigation. The annuity principal and interest payments now and in the future are not subject to income taxes. Annuities also help prevent dissipation either through poor investments and aggressive spending. Most importantly, annuity accounts have a strong track record of safety and security so you can rest assured that your payments will arrive each cycle when they are expected and needed.
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