- Investing in an annuity is great way to save for retirement or to save for a child's college fund. An additional benefit to investing in annuities is the tax deferred status your money holds during the investment period. There are several different types of annuities and payout options. Here are a couple things to look for when deciding to invest in an annuity.
- In technical terms, an annuity is defined to be a contract or agreement --usually with your insurance or investment company--where you receive a fixed payment from an investment. This payment can be made in a lump-sum amount, or in portions over a period of time. Typically, withdrawals cannot be made until the age of 59-1/2. If a withdrawal is made prior to this age, tax penalties and surrender charges are applied.
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Tax penalties run along the lines of 10 percent on the investment amount plus the regular income tax rate on the investment's earnings. The surrender charge is applied by the insurance company that held the investment. These same penalties do apply when an annuity is being used to fund a child's college education.
Annuity payouts are taxed depending on what type of annuity you have.
~ Qualified annuities are funded with before tax dollars. No taxes are applied to after tax portions invested in the plan when it comes time for withdrawal, and investment earnings are not taxed until withdrawal.
~ Nonqualified annuities are funded with after tax dollars. Taxes are applied to the earnings portion of your investment at time of withdrawal. -
The types of annuity options available vary according to how money is paid in, how money is withdrawn and how the money is invested.
~ Single premium annuities are for when you're investing one lump sum amount.
~ Flexible premium annuities allow for a minimal investment, with varied payment amounts throughout the investment period.
~ Fixed annuities are placed in the more conservative investment vehicles like bonds. Your principal investment amount is guaranteed, and a minimum earnings interest rate is guaranteed as well.
~ Variable annuities are typically invested in mutual funds. The principal investment amount is not guaranteed, and payouts are determined by how much your investment earns. -
You, as investor, have the option to choose how your withdrawals, or payout amounts, will be made. Fixed amount payouts are made until the annuity is used up. Fixed period payouts are made over a predetermined period of time. Lifetime payouts are made until time of death. The installment-refund option makes payments available to your survivors should you die before the annuity is used up.
It's best to research annuity options before making an initial investment. Your individual needs and circumstances can help determine which annuity option is best for you.
