Annuity Awareness: Annuity 101

When building a retirement strategy, an annuity could be a consideration for an investor looking for a consistent retirement income stream with potential growth that is tax deferred. Or an investor who can contribute more money than is allowed in a 401(K) or defined contribution plan, as there are no limits on annuities.

But what is an annuity? We’re glad you asked:

An annuity is a long-term, tax-deferred insurance contract or investment designed for retirement. It allows you to create a fixed or variable stream of income during your retirement through a process called annuitization.

An investor can purchase an annuity with a lump sum or monthly payments. The money is invested for a future date, when the money can be taken by the investor either monthly, quarterly, annually or in a lump sum. That money can also be guaranteed for a specific period or for a lifetime.

If a person has an annuity with a guaranteed 10-year income, and that person dies after five years, beneficiary will receive payments for the remaining five years.

If a person has an annuity with lifetime payments, beneficiaries receive nothing upon the death of the holder of the annuity. It is possible to get an annuity with lifetime payments and a set number of guaranteed years. In that case, if the person dies before the end of the guaranteed years, beneficiaries would receive the remaining guaranteed funds.

Money invested in an annuity can grow tax-deferred. When the money is withdrawn, only the amount withdrawn is taxed, not the total amount of money.

Similar to a 401(k) or other defined contribution plans, money from an annuity can be subject to an additional 10 percent tax penalty – on top of your current tax rate – if it is removed before 59 ½.

There are three types of annuities:

• FIXED ANNUITY: It provides a fixed rate of return based on the terms of your contract. Annuity holder will receive a fixed income in retirement.
• VARIABLE ANNUITY: It allows you to control how the money in the annuity is invested. But the payout amount will change with the performance of the investments. 
• INDEXED ANNUITY: It allows money to be invested in a stock market index, i.e. Standard & Poor’s 500. Payments are based on the performance in the annuity.

Source: https://www.oneamerica.com/articles/article-juneannuityawareness1