Explanation of Annuities
Most investors close to retirement have heard of annuities but aren't really sure what they are and how they serve to benefit their investment needs.
What Are Annuities?
In short annuities are an investment contract between you and the company that issues the annuity, which are typically companies that sell life insurance. The buyer makes regular payments toward the annuity every month until it matures. Once it matures the annuity contract typically offers you a guaranteed rate of return in exchange for your investment which is paid out at a specified point of time, usually around retirement.
Benefits of Annuities
The major benefit of an annuity is that the money you invest is tax deferred until you start withdrawals at a specified point in time. At that point only the money gained is taxable, since the money you invested is done so on a post tax basis (taxes are already taken out of your paycheck for the money you invested).
Another major benefit is the low risk associated with annuities. Unless the issuing company goes under completely, the payments are guaranteed and even then most of them are insured up to a certain amount.
One other benefit of annuity investing is that there is no maximum investment. IRA accounts and 401K plans have similar tax benefit to annuities but they also have a maximum allowable contribution where annuities do not. Typically annuities are a wise choice for people looking for similar tax deferred benefits to IRAs or 401Ks but have already maxed out their contributions to those plans.
Types of Annuities
There are many different types of annuities that are available and may be appropriate for different types of investors. The most common type of annuity is a fixed annuity that offers a guaranteed rate of return in exchange for you making payments until maturity. This rate of return is typically not a lot, maybe 5%, which is paid out in the future and continues to be paid monthly until your death or the death of your spouse, depending on your contract.
For those looking for a higher rate of return you also have the option of a variable annuity. Variable annuities have the same tax benefits of a fixed annuity but they offer a variable rate of return based on market performance. Depending on who is issuing the variable annuity there are a variety of investment options such as mutual funds, bonds or an assortment of stocks that you can invest in with varying degrees of risk. While these don't offer a guaranteed rate of return the tax benefit makes variable annuities an attractive investment option.
Annuities are an interesting investment option for investors looking to have a nice secure investment, especially the way the economy has performed over the last few years. If you feel that annuity investing might be right for you consult your financial advisor for more information.
Benefits of Annuities
The major benefit of an annuity is that the money you invest is tax deferred until you start withdrawals at a specified point in time. At that point only the money gained is taxable, since the money you invested is done so on a post tax basis (taxes are already taken out of your paycheck for the money you invested).
Another major benefit is the low risk associated with annuities. Unless the issuing company goes under completely, the payments are guaranteed and even then most of them are insured up to a certain amount.
One other benefit of annuity investing is that there is no maximum investment. IRA accounts and 401K plans have similar tax benefit to annuities but they also have a maximum allowable contribution where annuities do not. Typically annuities are a wise choice for people looking for similar tax deferred benefits to IRAs or 401Ks but have already maxed out their contributions to those plans.
Types of Annuities
There are many different types of annuities that are available and may be appropriate for different types of investors. The most common type of annuity is a fixed annuity that offers a guaranteed rate of return in exchange for you making payments until maturity. This rate of return is typically not a lot, maybe 5%, which is paid out in the future and continues to be paid monthly until your death or the death of your spouse, depending on your contract.
For those looking for a higher rate of return you also have the option of a variable annuity. Variable annuities have the same tax benefits of a fixed annuity but they offer a variable rate of return based on market performance. Depending on who is issuing the variable annuity there are a variety of investment options such as mutual funds, bonds or an assortment of stocks that you can invest in with varying degrees of risk. While these don't offer a guaranteed rate of return the tax benefit makes variable annuities an attractive investment option.
Annuities are an interesting investment option for investors looking to have a nice secure investment, especially the way the economy has performed over the last few years. If you feel that annuity investing might be right for you consult your financial advisor for more information.
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KevinK47
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