An annuity is a contract between you and an insurance company whereby you agree to give the issuer principal and in return the issuer guarantees you fixed or variable income payments over time. While annuities are not insurance policies, they are issued by insurance companies.

Annuities are long-term tax-deferred investments intended for retirement planning. You can fund it in a lump sum or a little at a time, and all capital in an annuity grows and compounds tax-deferred until you begin making withdrawals.[1]Unlike retirement plans, however, there is no limit as to how much you can invest in annuities (unless it’s a qualified plan), and you generally do not have to begin withdrawals until at least age 85 (unless it’s a qualified plan).

The large number of annuity products on the market today can make selecting the right annuity a confusing process. But in fact, there are only a handful of different types of annuities. When selecting an annuity you will be presented with several choices:

• Timing of payout: immediate or deferred: In an immediate annuity, the investor begins to receive payments immediately. This is usually for investors who need immediate income.  In a deferred annuity, the investor receives payments starting at some later date, usually at retirement.
• Investment type: fixed or variable: Fixed annuities are invested primarily in government securities and high-grade corporate bonds. They offer a guaranteed rate over a period of one or more years, as stated on the contract. Variable annuities enable you to invest in a selection of sub- accounts.   These sub-accounts are tied to market performance, and are often modeled after publicly-traded mutual funds.

In addition, annuities can be:

• ‘single premium’, meaning only an initial deposit is permitted into the contract, and any additional deposits would require a new contract, or
• ‘flexible premium’, which permits periodic or regularly-scheduled additions, including automatic withdrawals from a bank account.   Variable annuities are almost always structured as flexible premium annuities.

Withdrawals of earnings or other taxable amounts are subject to income tax and if made prior to age 59 1/2 may be subject to an additional 10% federal penalty tax.   Early withdrawals have the effect of reducing the death benefit and contract value.

For specific tax advice, please consult a qualified tax professional.

Guarantees are subject to the claims paying ability of the issuing insurance company.