Annuities are insurance products. For a fee, the insurance company will give you a guarantee on the money you place with them.
Different companies offer different types of guarantees. It can be a guaranteed rate of return on your money for a certain number of years, or a guarantee of lifetime income (the amount is based on your life expectancy).
Annuity income can start immediately or be deferred, meaning the income starts after a period of time (usually when you expect to retire). Deferred annuities can grow either at a fixed rate of return, at a rate based on a market index, or they can be variable (based on the performance of the investments you choose inside the annuity).
Annuities are also tax-deferred retirement vehicles. That means the tax on the growth in your investment is deferred until the money comes out.
Because of the tax savings and guarantee options, annuities can be a useful part of a financial plan.
There is a surrender charge (CDSC) imposed generally during the first 5-7 years that you own your annuity contract. Withdrawals prior to age 59 ½ may result in a 10% IRA tax penalty, in addition to any ordinary income tax. The guarantee of the annuity is backed by the claims paying ability of the issuing insurance company.
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