Learn About Annuities
One of the attractive aspects to an annuity is that the interest and/or capital gains earned on your money are tax deferred until you begin to receive payments back from the annuity issuer. In this respect, an annuity is similar to a qualified retirement plan. Over a long period of time, your investment in an annuity can grow substantially larger than if you had invested money in a comparable, taxable investment. However, like a qualified retirement plan, there may be a 10 percent tax penalty if you begin withdrawals from an annuity before the age of 59½.
Two distinct phases
There are two distinct phases to an annuity: (1) the accumulation (or investment phase), and (2) the distribution phase.
- The accumulation (or investment) phase is the time period when you add money to the annuity. You can purchase the annuity in one lump sum (called a single payment annuity), or you can add a series of payments in an annuity. The payments may be of equal size over a number of years, or they may consist of a series of variable payments.
- The distribution phase is when you begin receiving distributions from the annuity. You have two general options for receiving distributions from your annuity.
Option 1: You can withdraw all of the money in the annuity in one lump sum, or you can withdraw the money over a period of time.
Option 2: Receive a guaranteed income stream from the annuity. This option is commonly referred to as the annuitization option. Under this option, the annuity issuer promises to pay you an amount of money on a periodic basis (monthly, quarterly, yearly, etc.). You can elect to receive either a fixed amount for each payment period (called a fixed annuity payout) or a variable amount for each period (called a variable annuity payout). You can receive the income stream for your entire lifetime (no matter how long you live), or you can receive the income stream for a specified time period (e.g., ten years). You can also elect to receive the annuity payments over your lifetime and the lifetime of another person (called a "joint and survivor annuity").