What are annuities? People hear this term all the time, but there is still confusion about what an annuity is. Let’s make this simple.
An Annuity is a contract that is sold by an insurance company as a savings vehicle very similar to certificates of deposit with banks. Yet, they are very different.
Bank certificates of Deposit, the interest that accrues is taxable for that year reported.
Annuities, the tax is deferred. This allows the annuity to grow without tax consequences until the money starts to be withdrawn. In addition, because this money grows tax-deferred, there are consequences if the money is withdrawn before a certain age. (59 ½).
Note, “tax-deferred” IS NOT the same as “tax-free”.
There are many types of annuities available. Let’s look at a few.
Single Premium Deferred Annuity: You invest one lump sum of money into one contract. You cannot add additional monies.
Flexible Premium Annuity: It is an open ended contract that allows additional monies to be contributed over time.
Immediate Annuity: This is a contract where you contribute a sum of money to be paid out over a certain period of time. These are great vehicles for lump sum settlements.
Variable Annuity: These are security-based annuities that have a multitude of separate accounts (similar to mutual funds) that you can invest in. You can also purchase riders to lessen risk.
Many people have questions about annuities, yet there are many advantages to adding them to your portfolio. If you have monies sitting in the bank earning low-interest rates, let us do a comparison for you. We will show you the pros and cons depending on your situation.
- New York State Annuity Guide
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We will take the mystery out of the word annuity.