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What is an Annuity?

Annuities are tax deferred investment vehicles that are created by insurance companies. Tax deferred means that the only time that money can be withdrawn safely without penalty is at the retirement age of 67 1/2. The account holder than pays taxes on the capital gains in the annuity as the money is withdrawn.

Types of Annuities:

Fixed and variable. Annuities also have a muturiry date which is between 5 – 7 years. After the annuity matures, the money in the annuity can be placed into another tax deferred account without penalty.

Fixed Annuities:

A fixed annuity pays the account holder a fixed yearly interest rate over the duration of the annuity before it matures. The interest rate will most likely be much higher than one may get in a Certificate of Deposit (CD) or bank savings account. This is because an investor has to keep the money in the account for much longer than a CD, and the money isn’t liquid like a savings account.

Variable Annuities:

A variable annuity typically invests in stock mutual funds and are subject to swings in the market.

Tips when investing in an annuity:

Variable annuities have have very high management fees ranging from 7-9%. (The average stand-alone mutual fund is 1-5%). Annuities are guaranteed by the insurance company issuing them and are not FDIC insured. An investor under 40 would not benefit from a fixed annuity investment, as they would probably fare better invested in the market, as the rate of return would most likely be significantly higher over time. A younger investor statistically has more time to benefit from gains in the market, and conversely weather the potential losses as well.

In conclusion, read the annuity contract! You may realize that that there are other options that better serve your investment objectives.

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What is an Annuity?

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