Annuities are financial products that straddle the line between life insurance and retirement planning. Learn about the various types of annuities, how they work, and which ones are best for you and your family.

Frequently Asked Questions

  • What is an annuity?

    An annuity is a financial account used to save for and spend during retirement. Premiums deposited into an annuity grow on a tax-deferred basis. If they’re withdrawn before age 59 ½, there are usually tax penalties. A feature of annuities and what makes them insurance products is that you can elect to receive the value of your annuity in payments guaranteed for life - no matter how long you live. 

  • What is an immediate annuity?

    There are two main types of annuities: deferred and immediate annuities. Deferred are the type you contribute to for a future, long-term goal, such as retirement. Once you reach that goal, you can make withdrawals or annuitize to access the money. With immediate annuities, you skip the saving part. Instead, you purchase an immediate annuity with a lump sum that is converted into guaranteed income for life or a designated number of years.

  • How are annuities taxed?

    How annuities are taxed depends on when and how you access the money and whether the annuity is held in a retirement account (and what type). Unless the annuity is in a Roth-type account, withdrawals are generally taxed as income and may be assessed a 10% penalty tax if withdrawn prior to age 59 ½. If you annuitize, payments may be only partially taxable because a portion is seen as a return of principal. Qualified distributions from a Roth account are not taxed, while distributions from a non-Roth retirement account are taxed as income.

  • What is a fixed annuity?

    A fixed annuity is an annuity in which you receive an interest rate guaranteed by an insurance company. Unlike some other fixed interest accounts, earnings are tax-deferred until withdrawal. It can be either a deferred annuity that you contribute to for years before making withdrawals, or an immediate annuity, which is purchased with a lump sum and annuitized immediately. Fixed annuities are generally low-risk investments with limited upside potential.

  • How do annuities pay out?

    If you have a deferred annuity, you can choose to make withdrawals from the account or annuitize. If you annuitize, you exchange some or all of the contract value for a stream of guaranteed payments. You can structure those payments in a few different ways. Common payout options are for life, for the longer-lived of you and a spouse, for a specific number of years, or for your life with a minimum number of years guaranteed. If you purchase an immediate annuity, you’ll choose one of the annuitization options.

  • How do variable annuities work?

    You can invest in a range of market securities like mutual funds in a variable annuity (VA) and your gains are tax-deferred until you begin taking income from the annuity. But while your potential for gain is theoretically unlimited, you could lose the entire value of the annuity because market investments aren’t guaranteed. To mitigate this, many VAs offer withdrawal and income riders that allow you to receive payments from the annuity even if it loses some or all of its value.

  • What is a deferred annuity?

    A deferred annuity is a  tax-deferred account you can use to save for retirement. You don't pay taxes until you withdraw money or annuitize and start receiving payments, and there's no annual contribution limit (unless the annuity is part of a qualified retirement plan). Like an IRA or a retirement plan through work, you’ll generally need to wait until 59 ½ to withdraw funds without penalty.

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