An annuity is an insurance product that pays out cash for you to use in any way. Annuities are commonly used as part of a retirement strategy and are a popular choice for savvy investors looking for a steady source of income.
How does an Annuity work?
1) You make an investment in the annuity.
2) Money is paid out to you at a later date or a series of dates, such as monthly, quarterly, or annually. You can even have the cash paid out to you in one lump sum.
More on Payments
Payments can come to you for the rest of your life or for a predetermined number of years, depending on what you and your financial advisor decide is best for you. The amount you receive depends if you choose a fixed annuity (guaranteed payment) or variable annuity, which depends on your annuity’s investments.
What are the Types of Annuities?
There are two basic types of annuities: deferred annuity and immediate annuity.
With a deferred annuity, your money is invested for a predefined period of time and is typically withdrawn in your retirement.
With an immediate annuity, you can start receiving your payments shortly after you make your initial investment into the annuity. Typically, investors purchase an immediate annuity as they approach retirement.
Tax Benefits*
There are tax benefits to annuities. Any money that you invest grows, tax-deferred. Any amount you contribute to the annuity is not taxed; however, earnings are taxed depending on your tax bracket. Unlike a 401k or an IRA, there is no limit on the amount you can invest into an annuity. Also, the minimum withdrawal requirements for an annuity are less restricting than those of a 401k or an IRA.