Basic Definition for an Annuity
A contract sold by an insurance company in order to provide payments to the purchaser at organized intervals, primarily after retirement. The holder is taxed only when they start taking money out. All annuities are tax-deferred (you will have to pay taxes later), meaning that the earnings from investments in these accounts grow tax-deferred until withdrawal. Annuity earnings are also tax-deferred so they cannot be withdrawn without penalty until a certain specified age, usually 59 1/2. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns and losses. An annuity has a death benefit equivalent to the higher of the current value of the annuity or the amount the buyer has paid into it. If the owner dies during the time he/she is adding to it phase, his or her heirs will receive the accumulated amount in the annuity. This money is subject to ordinary income taxes in addition to estate taxes.
Three Basic Types of Annuities
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