Annuities

What are the different types of annuities?

There are two basic types of annuities: Deferred and Immediate.

With a deferred annuity, your money is invested for a period of time and accumulates until you are ready to begin taking withdrawals, typically in retirement. Deferred annuities can also be converted into immediate annuities when the owner wants to start collecting payments.

If you opt for an immediate annuity you begin to receive payments soon after you make your initial investment, you might consider purchasing an immediate annuity as you approach retirement age.

Within these two categories, annuities are considered: Fixed or Variable  what determines this is dependent on whether the payout is a fixed sum, tied to the performance of the overall market or group of investments, or a combination of the two.

Are there tax benefits to annuities?

Yes. Money that you invest in an annuity grows tax-deferred. When you eventually make withdrawals, the amount you contributed to the annuity is not taxed, but your earnings are taxed at your regular income tax rate.

What are the advantages of annuities?

The biggest advantage annuities offer is that they allow you to invest a larger unlimited amount of cash and defer paying taxes. Unlike other tax-deferred retirement accounts such as  a 401(k) or an IRA, there is no annual contribution limit for an annuity. This is particularly useful for those closest to retirement age and need to catch up.

All the money you invest compounds year after year without any tax bill from Uncle Sam. That ability to keep every dollar invested working for you can be a big advantage over taxable investments.

When you cash out, you can choose to take a lump-sum payment from your annuity, but many retirees prefer to set up guaranteed payments for a specific length of time or the rest of your life, providing a steady stream of income. The annuity serves as a complement to other retirement income sources, such as Social Security and Pension Plans.

What is an equity-indexed annuity?

An equity-indexed annuity is a combination of a fixed and variable annuity, and give you the best of both worlds.

Guaranteed return: With a fixed annuity, you get the low-risk appeal of a guaranteed minimum return (usually 2% to 3%).

Market Growth: A variable annuity, provides a shot at higher gains if the stock market rises, since an equity indexed annuity's return is also tied to the performance of a benchmark index, such as the Standard & Poor's 500.

What are its advantages?

With an equity-indexed annuity, you get to participate in the upside when the stock market is climbing, but you protect yourself against the downside since you'll earn a guaranteed minimum return even if stock prices fall. In short, an equity-indexed annuity may pay a higher return than a standard fixed annuity  would, but have less risk than a variable annuity.