Understanding the basics of annuities. This is a an annuity 101 article defining what is an annuity.
An annuity is a contract between an investor and insurance company designed to provide a steady income stream to the investor, usually after retirement. Annuity investors pay regular premiums to the insurer, then, once the contract is ‘annuitized,’ the investor receives regular payments for a set period of time. Annuities can grow tax-deferred, meaning investors pay no taxes on the earnings until they receive payments or make withdrawals.
Like pension plans and Social Security, annuities offer the potential for lifetime income, which you could use to help meet your everyday needs in retirement. This steady stream of money could supplement your 401(k) or IRA savings and potentially free up the money in those accounts for other things such as travel or unexpected expenses. The payments are usually made monthly, and the amount you receive depends on many factors, including your account balance, life expectancy, and the type of annuity you select.
Knowing when you want annuity payments to begin may help you narrow down your choices. If you want to start receiving income right away, an immediate annuity might make the most sense for you. With a deferred annuity, you purchase it now, and the payments start at a designated date in the future. This means your money has an opportunity to grow tax deferred. You don’t pay taxes on any earnings until distributions begin.
Learn more about investing in income-generating annuities
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Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Optional riders are available at an additional cost. All guarantees are based on the claims paying ability of the insurer. An annuity is a tax-deferred investment. Holding an annuity in an IRA or other qualified account offers no additional tax benefit. Therefore, an annuity should be used to fund an IRA or qualified plan for annuity features other than tax deferral. Product features and availability vary by state. Restrictions and limitations may apply.
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