An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.
The good thing about them is that you don’t pay any tax on it as long as you don’t withdraw any money. And once the payout begins, the money you receive is taxed as ordinary income and not as capital gains tax.
However if you withdraw money from it before the specified date you will be paying substantial charges to the insurance company and tax penalties.
There a basically three kinds of annuities. These are the fixed, variable and indexed. The fixed annuity is a good option for conservative investors, because the insurance company guaranteed to pay you a specified interest rate and also agrees to make periodic payments in a specified amount over a definite period or an indefinite period such as your lifetime or the life time of your spouse. The return on your investment may be low but is guaranteed.
The variable annuity on the other hand lets you choose the investment channels where you would like to invest your money. You have the option to invest in stocks, mutual funds money markets and other options. You can take advantage of maximizing the earnings of your investment and the deferred tax payments. However the rate of return and the periodic payments you will receive will depend on the performance of the investment options you have chosen.
The indexed annuity will give you payments with a return based on the changes in an index. The insurance company guaranteed a minimum return with indexed annuities so even if the stock indexed does poorly your risk is still limited.
Whatever kind of annuity you may choose; no other investment can assure you of having an income for as long as you live by making a lump-sum or series of payments that won’t have to cause pain in your budget. Annuity proves to be the soundest investment one could ever make with the various types that are customized to suit the different needs of investors. By knowing how do annuities work you will be guaranteed the happiness that you really deserve for your retirement.
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