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What is an
annuity?
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An
annuity is an investment contract or policy between you and a life
insurance company. Annuities can be a useful tool for retirement
planning:
- Save tax-free
Annuities enable you to save money on a tax-deferred basis. You will
not pay taxes until you begin to withdraw your money. Unlike a
401(k) or IRA, there are no limits on the amount you can put into an
annuity.
- Offers retirement income
You can purchase a contract that provides lifelong income or one
that pays you for a specific time. Payments can be monthly,
quarterly, semiannually or annually at a designated time.
- Provides benefits to your heirs
Some annuities include an insurance component. If you die before you
start to collect on the annuity, it pays your heirs the amount you
invested plus interest or the market value of the funds in your
account, whichever is more.
- Offers an array of investment options
You determine how much you want to invest in an annuity and the
amount of investment risk you are willing to take. If you put your
money into a variable annuity, your premiums can be invested in
stock or bond funds. There are no tax consequences if market
conditions prompt you to change how your balances are invested. You
can also change from one fund to another without tax consequences.
If you don't want to deal with the ups and downs of the stock
market, you can invest your money in a fixed annuity, which would
offer you a specific rate of return.
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