- What Is an Annuity?
- May 18, 2017
Regardless of gloomy economic forecasts, there are always a variety of options for investors. Because they are tax-deferred, a popular choice is an annuity.
What is an Annuity?
An annuity is created when an insured party gives life insurance companies money that is distributed back to the insured party over a certain period of time.
There are several kinds of annuities. Immediate Annuities can be fixed or variable. A fixed immediate annuity payment depends on the amount contributed, the age of the investor and the interest rate at time of purchase. Fixed annuities guarantee a certain payment amount.
Typically, both types are relatively safe, low-yielding investments.
A tax-deferred annuity pays out to investors who prefer payments to begin at a future date, typically at retirement. This allows income tax to be deferred until the money is withdrawn. Having an annuity allows an investor to contribute as much money as they like each year. Want to look further into types of annuities? Visit our article, Understanding Different Types of Annuities.
What are the Advantages of an Annuity?
There are a number of advantages to investing in an annuity. A tax-deferred annuity allows you to put aside funds you pay into the annuity for as long as you want without worrying about exceeding federal tax limits.
Investors also have more flexibility. An annuity provides a variable or a fixed return – without federal tax limitations.
“Annuities have a long history of producing guaranteed income and tax-deferred accumulation,” advised Brian Ashe, President of Brian Ashe and Associates, Ltd. in Lisle, Ill., and Treasurer of the Life and Health Insurance Foundation for Education (LIFE). “They certainly need to be considered as a possible financial tool in a portfolio.”
Also, there is added security. An annuity offers a fixed-income payout option that grants an income that cannot be outlived, according to the LIFE Foundation. As with most investments, there are risks involved with annuities. To understand these, visit our article Questions to Ask Before Buying an Annuity.
For many people, annuities offer an opportunity to accumulate funds that are free of income and capital gains taxes. That can help provide a guaranteed stream of income in the future or pay for other large investments such as your child’s college tuition or retirement.
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