What is an annuity?
An annuity is a financial agreement between a person and another entity. They are usually contracts made with an insurance company that will give a person periodic payments that may start immediately or at some future date. You fund the annuity with a series of payments or possibly with a single payment.
Earnings within an annuity are generally not taxable until you actually receive payments from the annuity. Once you do begin to receive the payment or payments, part of the payment will be considered to be previously taxed principal that you had paid into the annuity and the rest will be considered earnings. The earnings portion will be taxable. If the annuity was used to fund a qualified retirement account like an IRA, then you would have been funding the annuity with money that had not been taxed; therefore, the entire payment amount would be subject to taxation.
Annuities have two phases. The first is the accumulation phase, and during this time, the annuity's growth is not subject to taxation. Next comes the distribution phase, which may occur over a series of scheduled payments or as a single lump-sum distribution. Transitioning to the distribution phase is called annuitization.
As the average person's lifespan continues to increase people are becoming increasingly at-risk of outliving their money. Annuities are ideal for providing a steady stream of income during retirement.
Save money on a tax-deferred basis. You gain you the advantage of earning interest on money that would not be present in a savings program which is not tax-advantaged and then earning interest on that interest.
Unlike programs like IRAs and
401(k) plans, there is virtually no limit as to the dollar amount you
can contribute into annuities. For a person who is already contributing
the maximum amount allowed to their qualified plans, an annuity is an
ideal way to increase the amount of money a person will have available
Annuities offer an extremely safe way to invest your money. An exception to this would be variable annuities where you are able to invest in securities like mutual funds. The performance of the plan is going to be directly related to the performance of the underlying securities.
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