Financial markets have a tendency to capriciously fluctuate with little predictability. Because annuity income is generally considered guaranteed, safe, and reliable, it can provide greater financial stability for retirement years.
An annuity is a contract between you and an insurance company: you fund the annuity either with a lump sum or with regular payments, and the insurer agrees to pay a predetermined amount over an agreed timeframe.
Many people find the ability to structure an income source that they are unlikely to outlive one of the most appealing features of annuities. For payout structures that focus on steady lifetime payments, see Income Annuities.
You also have multiple payout choices. For example, you can elect payments guaranteed for your lifetime only, or payments guaranteed for both your lifetime and a beneficiary’s lifetime; the latter option typically reduces each payment. For contracts emphasizing predictable interest crediting, consider Fixed Annuities.
Other benefits include tax-deferred growth, the ability to contribute unlimited amounts of post-tax dollars, and the option to continue contributions in some contracts even after retirement. You generally don’t pay taxes on an annuity until you take a withdrawal, and early distributions taken before age 59 1/2 may incur a 10% federal tax penalty in addition to ordinary income tax.
Annuities can also help with estate planning. If you name a family member as beneficiary, they typically receive the benefits directly without waiting for probate, and a surviving spouse can often maintain the annuity’s tax-deferred status.
Different annuity designs suit different goals and risk tolerances; for options that link gains to a market index while offering downside protection, see Indexed Annuities. An annuity won’t be the ideal choice for everyone, so review your situation and, if helpful, talk to an agent before deciding.
* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.
Frequently Asked Questions
How does tax-deferred growth work with an annuity?
Earnings inside an annuity grow tax-deferred, meaning you don't pay income tax on gains until you withdraw money, at which point withdrawals are taxed as ordinary income.
Will an annuity prevent my beneficiary from going through probate?
If you name a beneficiary, proceeds usually pass directly to that person and often avoid probate, but specific contract terms and state rules can affect this outcome.
Are annuity payments guaranteed?
Payments are guaranteed by the issuing insurance company and depend on its claims-paying ability; guarantees are not backed by the broader market or by the U.S. government.
What happens if I take money out early?
Early withdrawals before age 59 1/2 may incur ordinary income tax plus a 10% federal penalty, and surrender charges may also apply depending on the contract.