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Annuity: What Is An Annuity

Annuities are insurance contracts that make regular payments to you either immediately or at some point in the future. You can purchase an annuity to help grow or protect your retirement savings or to provide you with guaranteed income.

Annuities come in a variety of forms. Each type can have unique features that may help you achieve your financial goals whether you’re saving for retirement, approaching retirement, or living in retirement.

How tax-deferred annuities may help you save for retirement

If you are already saving as much as you can in your 401(k) or IRA,1 you can use this type of annuity to boost your retirement savings. Like any tax-deferred investment, earnings compound over time, providing growth opportunities that taxable accounts lack. Deferred annuities have no IRS contribution limits,2 so you can invest as much as you want for retirement. You can also use your savings to create a guaranteed stream of income. Depending on how annuities are funded, they may not have required minimum distributions (RMDs).

Withdrawals of taxable amounts from an annuity are subject to ordinary income tax. If you make withdrawals before age 59½, you may be subject to a 10% IRS penalty. Annuities also come with annual charges not found in mutual funds, which will affect your returns.

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