What is an annuity?

What is an annuity? How They Work

At its most basic level, an annuity is a contract between you and an insurance company that shifts a portion of the risk from you to the company. There are 2 basic types of annuals:

Income annuities can offer lifetime payouts or a fixed term in exchange for a lump sum investment. They can also increase the conservative portion of your portfolio which can be monthly, quarterly or even annually.

In all cases, since income annuity guarantees are subject to the ability of the issuing insurance company to pay claims, it is important that you do your research and choose an annuity issued by a financially sound insurance company. do

A tax-deferred annuity can allow you to accumulate tax-deferred savings while giving you the option of generating lifetime income in the future. Deferred annuities provide an opportunity to grow tax-deferred savings, allowing earnings to grow over time.

Generally, there are 2 ways to access your assets, each with their own tax implications. You can convert your savings into income and spread the tax burden over payments.

You can also take withdrawals, which are taxed first as dividends and then return the principal after the dividends are gone.

Important to consider: Some deferred annuities impose surrender charges or other penalties for withdrawals within a certain period after purchase.

How tax-deferred annuities can help savers

Deferred annuities can help you build retirement savings, once you’ve contributed enough for the year to qualified plans like 401(k)s and IRAs, and those annual IRS contribution limits. are not subject. 1 As with retirement plans, any investment growth is tax-deferred and you will not owe tax on an annual basis. The best use of tax-deferred annuity assets is that they can be converted into annuity income after retirement, resulting in lower taxes on long-term gains.

You can withdraw your tax-deferred annuity without converting it to an income annuity, but your gains will be taxed at ordinary income tax rates.

Tax-deferred fixed annuities have a fixed rate of return guaranteed by the issuing insurance company for a fixed period. In contrast, with a tax-deferred variable annuity, the rate of return—and therefore the value of your investment—can go up or down depending on the stock, bond, and money market investment option(s) you choose. will go down, which allows you to. Taking advantage of any market developments.

Tax-deferred annuities can also help you use a strategy called an anchor strategy. This strategy uses investments that offer a fixed return over a fixed period of time to protect a portion of your principal, such as CDs or tax-deferred fixed annuities.

Your remaining assets are then invested in growth-oriented securities such as stock mutual funds or exchange-traded funds (ETFs). The goal is to protect the principal of a conservative portion of your portfolio while still maintaining growth potential, which can help investors who are concerned about losing money during market volatility. .

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