Annuities are financial contracts between insurers and customers, wherein the insurer takes a large sum of money and then pays it back with interest as an income stream. These payments may begin immediately or be deferred, and the interest rate offered to the buyer or annuitant can be fixed or variable. The duration for which the income is provided can be for life or a set period in years.
Some annuity contracts require a single lump sum payment, while others may allow funds to accrue via regular contributions made by the annuitant. This latter type is often used as a more flexible investment plan for retirement. The contributions are not taxed, and earnings and the principal amount in the account are both allowed to grow with tax-deferred status.
These and other variations allow for a significant number of annuity types. The simplest model is that the insurer gets a single lump sum amount, and immediately starts making monthly income payments to the annuitant for a set duration. This kind of contract is sometimes needed to fulfill obligations associated with legal settlements. But more often than not, it is used by the newly retired who are suddenly able to withdraw big amounts from their qualified retirement plans.
In such cases, the part of the income stream which is principal coming back to the annuitant is not taxed. However, the earnings included in the payments being made by the insurer are considered as income and taxed accordingly. Note that the tax rate is not based on capital gains, but as an income tax.
The second option is a deferred annuity where the insurer first collects the money from the customer in the accumulation phase. Tax-deferred earnings and contributions add up to provide faster growth of the account. Once the distribution payments start after a specific date, it will be considered as income being earned by the annuitant.
Fixed rate deferred annuities for life with beneficiary protection offer the best option for ordinary investors looking at building a nest egg. It has a decent growth rate with tax deferred contributions and earnings, and guarantees an income stream for the buyer's entire lifetime after retirement. If the buyer dies before the income stream begins, the beneficiary will get a prespecified guaranteed amount.
For those looking at much faster growth and higher contributions because of the limitations of qualified plans like 401K accounts, there are annuity products with variable rates. The annuitant can choose to put funds in the account into a range of different investments, like mutual funds which invest in stocks, bonds, money market instruments, etc. Make sure the variable annuity guarantees a minimum rate of return, even if the investments made by the account do not perform well.
Some annuity contracts require a single lump sum payment, while others may allow funds to accrue via regular contributions made by the annuitant. This latter type is often used as a more flexible investment plan for retirement. The contributions are not taxed, and earnings and the principal amount in the account are both allowed to grow with tax-deferred status.
These and other variations allow for a significant number of annuity types. The simplest model is that the insurer gets a single lump sum amount, and immediately starts making monthly income payments to the annuitant for a set duration. This kind of contract is sometimes needed to fulfill obligations associated with legal settlements. But more often than not, it is used by the newly retired who are suddenly able to withdraw big amounts from their qualified retirement plans.
In such cases, the part of the income stream which is principal coming back to the annuitant is not taxed. However, the earnings included in the payments being made by the insurer are considered as income and taxed accordingly. Note that the tax rate is not based on capital gains, but as an income tax.
The second option is a deferred annuity where the insurer first collects the money from the customer in the accumulation phase. Tax-deferred earnings and contributions add up to provide faster growth of the account. Once the distribution payments start after a specific date, it will be considered as income being earned by the annuitant.
Fixed rate deferred annuities for life with beneficiary protection offer the best option for ordinary investors looking at building a nest egg. It has a decent growth rate with tax deferred contributions and earnings, and guarantees an income stream for the buyer's entire lifetime after retirement. If the buyer dies before the income stream begins, the beneficiary will get a prespecified guaranteed amount.
For those looking at much faster growth and higher contributions because of the limitations of qualified plans like 401K accounts, there are annuity products with variable rates. The annuitant can choose to put funds in the account into a range of different investments, like mutual funds which invest in stocks, bonds, money market instruments, etc. Make sure the variable annuity guarantees a minimum rate of return, even if the investments made by the account do not perform well.
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