An annuity is an investment in which investors can receive payments for a lifetime or for a specified number of years. Unlike IRAs and pension plans, which can impose certain eligibility requirements and limits, and mutual fund investments, which are subject to taxation every year, annuities offer people the option of investing without imposing any amount limits, and everyone is eligible to participate.
Annuities, although not tax-deductible, enable investments to grow tax-deferred until withdrawal and can be deferred or immediate. Immediate annuities begin payments one month after the initial investment was made (or on any other agreed upon date) and require a one-time investment. Deferred annuities grow tax-deferred until withdrawn or converted to an immediate annuity. Additional investments can be made prior to conversion to an immediate annuity.
What types of annuities are available?
• Fixed Annuity**
Fixed annuities pay the recipient the same amount every month. Because the amount withdrawn remains the same, there is a danger that inflation over several years may reduce the purchasing power of the payment.
• Variable Annuity
Variable annuities, however, pay an amount that depends on the investment performance of the investments held by the annuity. Variable annuities can help protect against inflation; however, with a variable annuity, the investor, not the insurance company, bears the investment risk and an investor's returns are based on the performance of the underlying subaccounts selected by the investor, which fluctuate with market conditions. Therefore, the value of a variable annuity on the amount of annuitization payments may actually go down.
• Immediate Annuity
Immediate annuities are annuity investments that are payable immediately to you after they are established.?
**All guarantees are contingent on the claims-paying ability of the issuing insurance company. Variable and fixed annuities may charge for separate account management fees and additional insurance costs, such as mortality and expense fees. Annuities have surrender charges for withdrawals in the early years and a 10 percent tax penalty for withdrawals prior to age 59 1/2.
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