Compare Mortgage Quotes

Refinance Rates for Today

Please enable JavaScript for the best experience.

In the mean time, check out our refinance rates!

Company Loan Type APR Est. Pmt.

Annuity

Posted on: 15th Apr, 2004 02:25 am
Annuity is a contract sold by an insurance company in order to provide payments to the contract holder at regular intervals especially after retirement. There are various types of annuities such as fixed, variable, deferred, lifetime annuities etc.

Annuities have the following features.
  • Tax deferral on earnings from Investment:

    Investment earnings, capital gains and investment income in annuities are not taxable until and unless you withdraw cash. This is quite similar to that of tax deferral in 401(k)s and Independent Retirement accounts (IRAs). But unlike these products, there are no limits on the amount that can be put into an annuity.

  • Providing protection from creditors:

    The money that you give the insurance company belongs to the company itself. So, creditors can access only the payments as they are made. Some state laws and courts aim to protect a part or all of the payments from the annuities.

  • Tax Free Transfer of Investment Options:

    Unlike mutual funds and other investments made with after-tax money, annuities allow you to transfer funds from one investment option to another without paying any taxes. This can be done by rebalancing which allows you to shift funds from those assets which have grown fast compared to the ones that have grown slowly.

  • Providing Lifetime Income:

    A lifetime immediate annuity converts an investment into a series of payments that continue up to your lifetime. The payments have 3 sources – your investment, investment earnings and cash from a pool of people in your group who do not survive as long as the actuarial tables forecast. The pooling provides you with a lifetime income from the annuity.

  • Benefits to heirs

    It is a misconception that if you pass away soon after starting an immediate lifetime annuity, the insurance company keeps your entire investment in the annuity. That may happen sometimes but in order to prevent it, you should purchase a guaranteed period with the immediate annuity. This commits the insurance company to continue paying your beneficiaries after your death.

    The payments are continued till the end of the guaranteed period which ranges from 10 to 20 years. The annuity benefits that pass on to your beneficiaries do not go through probate and these are also not governed by your will.
Annuities help to meet your retirement goals, diversify your investment options and at the same time manage your investment portfolio better.
You should think about an annuity after you have contributed maximum amount into your 401(k), IRA and other tax-deferred opportunities that are available to you.

What's good about it:

You are likely to get the following benefits if you invest in an annuity with after-tax dollars.
  • The insurance company guarantees lifetime income.
  • Your earnings on the investment are tax-deferred.
  • There are no income restrictions.
  • You can switch from one investment to another within the annuity and no taxes are charged for it.
  • There is no limit on the amount you invest into an annuity.
Posted on: 09th Nov, 2006 02:26 am
Page loaded in 0.210 seconds.