An annuity is a contract between you and an insurance company in which you make a lump sum payment or series of payments and, in return, obtain regular disbursements beginning either immediately or at some point in the future.
Annuities come in three main varieties - fixed, variable and indexed
The goal of annuity is to provide a steady stream of income during retirement. Funds accrue on a tax-deferred basis, and like 401(k) contributions, can only be withdrawn without penalty after age 59 1/2.
Many aspects of an annuity can be tailored to the specific needs of the recipient. In addition to choosing between a lump sum payment or a series of payments to the insurer, you can choose when you want to annuitize your contributions - that is, start receiving payments.
An annuity that begins paying out immediately is referred to as an immediate annuity, while one that starts at a preset date in the future is called a deferred annuity.
The duration of the disbursements can also vary. You can choose to receive payments for a specific period of time - for example, 25 years - or obtain them until your death. Of course, securing a lifetime of payments lowers the amount of each check, but it helps ensure that you don't outlive your assets.
How tax-deferred annuities may help you save for retirement
If you are already saving as much as you can in your 401(k) or IRA,1 you can use this type of annuity to boost your retirement savings. Like any tax-deferred investment, earnings compound over time, providing growth opportunities that taxable accounts lack. Deferred annuities have no IRS contribution limits, so you can invest as much as you want for retirement. You can also use your savings to create a guaranteed stream of income.
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