Annuities are a unique retirement investment in that they can cover both sides of the retirement planning equation — growing your savings and turning your savings into retirement income that you can’t outlive.

In its most basic sense, an annuity is a legal contract between you and a life insurance company. You agree to pay the insurance company one or more payments, called premiums. In return, the company promises to pay you income for a specified period of time, such as for the rest of your life, beginning now or at a later date.

Types of Annuities:

• Deferred vs. Immediate
• Fixed vs. Variable
• Tax Considerations
• Is an Annuity Right for Me?

Deferred vs. Immediate

Deferred Annuities
Deferred annuities allow you to save for retirement over the long term and not pay taxes on any earnings until you take withdrawals². You invest in a deferred annuity with a lump sum, a series of payments, or both. With a fixed deferred annuity, your investments earn a guaranteed interest rate. With a variable deferred annuity, your investment returns fluctuate based on the performance of your annuity’s investment portfolios. When you need to, you can convert your deferred annuity into guaranteed retirement income.

Immediate Annuities
You purchase an immediate annuity with a single lump sum, and your income payments begin within 12 months of the date of purchase (usually sooner rather than later). With fixed immediate annuities, your payment is based on a fixed interest rate. With variable immediate annuities, your payment is based on the value of the underlying investment, usually a stock portfolio. Before your payments begin, you determine:

• the schedule of your payments (monthly, quarterly, semiannually or annually)
• how long the payments will last (for a specific period of time, for your life or for your life and that of another person).

Fixed vs. Variable

Fixed Deferred Annuities
With traditional fixed annuities, the insurance company offers a guaranteed interest rate plus safety of your principal and earnings. Your interest rate will be reset periodically, based on economic and other factors, but is guaranteed to never fall below a certain rate — usually 3% to 4%. Fixed annuities also offer:

• Tax-deferred growth, meaning you don’t pay taxes on your earnings until you begin withdrawals, which can help your savings compound faster.
• Fixed, guaranteed income payments for as long as you live or for a specific period of time.
• Unlimited contribution limits for annuities not held in a qualified plan, like a 401(k) plan or IRA.

The drawback of traditional fixed annuities is that your interest rate and income payments may not keep pace with rising prices and your cost of living. Consequently, equity indexed annuities were created, which offer you the potential gains of the stock market and the guaranteed minimum return promised by a fixed annuity.

Variable Deferred Annuities
Variable annuities allow you to save for retirement by investing in mutual fund-like portfolios. Your returns will fluctuate based on the investment performance of the portfolios. A variable annuity also provides:

• A guaranteed death benefit, which guarantees your original investment to your heirs. Some variable annuities also lock in your account value every few years to preserve your annuity’s growth.
• Unlimited contribution limits for annuities not held in a qualified plan, like a 401(k) plan or IRA.
• A fixed account, in case you need a portion of your assets to earn a fixed rate of return.
• Tax-free transfers among your annuity’s investment portfolios, which reduces your tax burden.
• Guaranteed income payments for as long as you live or for a specific period of time.

Tax Considerations

The tax implications of annuity income payments and withdrawals can be complex, so it is important that you consult with your tax advisor. Here are some key considerations to keep in mind:

Income Payments
When you begin taking income payments from your non-qualified annuity, each payment is considered to include part of your original investment, which is not taxable, and earnings on your investments, which are taxable. This rule applies to you, the annuitant, and any beneficiary who would receive your payments after your death.

If you purchase your annuity through a qualified plan, like a 401(k) plan, your entire income payment is generally taxable because your premium payments were deducted from your paycheck and weren’t taxed at the time. The same is true of an annuity you own in an IRA if you were entitled to a tax deduction for your contribution.

Premature Withdrawals
Withdrawals of earnings from your non-qualified annuity before age 59 1/2 are subject to ordinary income tax plus an additional 10% penalty tax for early withdrawal.