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An Annuity is a retirement investment vehicle offered mostly by
Insurance Companies.
There are two types of Annuities, immediate and deferred. Immediate
Annuities provide immediate income and Deferred Annuities allow the
investments to grow before income is distributed. They are subject to
early withdrawal penalties just like an IRA if you withdraw before age
59 ½.
Immediate Annuities are usually invested in vehicles with fixed returns.
Deferred Annuities are offered in both Fixed and Variable accounts.
You can think of an Annuity as a vehicle providing a supplemental Social
Security check once you retire. When you “Annuitize” an Annuity, you can
get a check until your death, or even the death of your spouse. There
are also numerous other Annuitization options available.
Annuitization is simply stopping the investment phase
and beginning the distribution of the funds. While the money is in the
investment phase, the gains are not subject to taxes. Once you begin to
take income from the Annuitization, the income become taxable.
Annuities are now also offering “Portfolio Guarantees” varying from
principle guarantee against losses of the account value or thru income
withdrawals. Remember this is not a government or bank guarantee. Check
to see what the rating of the Insurance Company is before investing.
Also, since Annuities allow the investor to defer taxes till
Annuitization or income withdrawal, they are an excellent way for high
tax bracket investors to invest unlimited amounts of money for
retirement.
Because they offer guarantees and lifetime benefits, Annuities have
higher management costs which detract from the returns. The more options
you add to the product, the more the costs. But like everything else,
you get what you pay for.
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