AnnuitiesAnnuities let you take full advantage of the power of tax deferral,###DISCLAIMER:2_0 Tax Advisor - 1### so your money has the potential to grow faster. You can also use an annuity to supplement your IRA or company retirement plan, since there's no maximum contribution limit.
How Tax-Deferred Annuities WorkAn annuity is an investment contract with an insurance company, which manages your investment on your behalf. You can buy an annuity with a single payment or make periodic payments.
Annuities have two broad phases:
- During the accumulation phase, you pay into your annuity and the earnings in your account grow on a fully tax-deferred basis.
- During the distribution phase, typically after age 59 1/2, you receive the full value of your account -- principal and interest -- in a lump sum or regular payments.###DISCLAIMER:2_0 Annuity Tax Penalty###
Fixed vs. Variable AnnuitiesThere are two basic types of annuities: fixed and variable. Which type is best for you depends on your individual situation, return expectations, time horizon, and tolerance for risk.
- A fixed annuity pays a set rate of return on your money, guaranteed for a specific time period, so you are protected against market volatility.
- A variable annuity gives you the opportunity to earn higher returns by investing in a diversified portfolio of securities. It is subject to greater volatility, however, including the risk of loss of principal.
Tax ConsiderationsAnnuity earnings are tax-deferred, not tax-free. Upon distribution, you will pay taxes at your current income tax rate on the interest you receive. Earnings left in the annuity, however, will continue to grow on a tax-deferred basis until withdrawn. There is no added tax-deferred advantage from investing qualified funds, such as an IRA, in an annuity.
When you purchase an annuity for an IRA or other qualified retirement plan, your contributions may be tax-deductible. Contributions to a nonqualified annuity are not tax-deductible.