Annuities are long-term growth vehicles that offer specific advantages for retirement purposes. This guide focuses on two main types of tax-deferred annuities: fixed and variable.
In the most basic terms, an annuity is a contract between you and an insurance company, which states that in exchange for your payment (premium), the company agrees to pay you an income in the future. From a retirement planning perspective, however, this basic definition ignores the most important aspects of a tax-deferred annuity.
What makes an annuity so appealing as a retirement vehicle are benefits such as tax-deferred growth, retirement income management, flexibility, and death benefit protection for beneficiaries. Only tax-deferred annuities combine these advantages to help your money grow faster now, help you control when you pay taxes, and help you manage your money efficiently in retirement.
This is the most important benefit of annuities. It can help your investment grow faster than a taxable asset earning the same rate of return. See The tax benefits of annuities for a more complete discussion.
Annuities can help you manage income during retirement with payout options that include a steady cash flow to suit your personal needs, or a guaranteed lifetime income based on your contract value. You can choose the option that best fits your retirement lifestyle.
An annuity can help you manage your changing financial needs throughout your lifetime.
- Unlike a 401(k) plan or traditional IRA, there is usually no annual limit on contributions; also, you are generally not required to begin withdrawals at age 70½ unless your annuity is held in a qualified plan), so your money can keep growing tax deferred until you need it. Annuity distributions are generally not required until age 90 (this rule is based on the specific contract requirements and can vary).
- You select investment options to suit your financial goals, and you can transfer your money among them, tax free, when you wish. This enables you to adjust your investment strategy as your goals or market conditions change without worrying about losing some of your earnings to taxes.
Many variable annuities feature a guaranteed death benefit; if you should die during the accumulation phase, the issuing company will return (at least) the amount of your original purchase (minus any withdrawals you've made) to your family or other beneficiaries, even if your annuity has declined in value. This death benefit avoids the costs and delays of probate (estate or other taxes may apply).
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