You decide on the annuity features that put you on the right track.

Annuities are insurance company contracts. The premiums you pay and tax-deferred earnings on those premiums are designed to be a source of retirement income, either in the future if you choose a deferred annuity or right away with an immediate annuity.

With a deferred annuity, the principal and earnings accumulate in the build-up period. Eventually you can annuitize, which means you convert your account value to a stream of lifetime income, or you can take the money some other way. With an immediate annuity, the lifetime income you receive is based on several factors including the amount of your purchase, your age, and the interest rate.

Fixed vs variable annuities

Unlike most other retirement plans, an annuity will guarantee a stream of income for your lifetime or for your lifetime and that of another person. While you may choose some other payout alternative if it’s a better fit with your long-term financial plan, the assurance of income for life can help make your retirement more secure.

The annuity debate

Annuities, variable annuities in particular, have advocates and critics. The advocates feel that the insurance protection the contracts offer, the potential for growth, and the promise of lifetime income make them valuable retirement-planning products. Critics argue that annuity fees are too high for the investment and insurance benefits these contracts provide

For example, if your fixed annuity pays you a specific amount each month for your lifetime, your income may not be as vulnerable to losses in the investment markets, which may reduce your dividend or interest income or eat into your principal. Remember, though, that fixed annuity income depends on the ability of the issuing company to pay, so researching annuity company ratings before buying is crucial If you’re concerned that depending on a fixed income would expose you to too much inflation risk, you might consider a variable annuity.

In that case, your lifetime income, which may increase over time, depends on the investment performance of the subaccounts, or investment funds, you select from among those offered in the contract as well as the company’s ability to pay claims. The risks in this case include the potential for a decrease in income in some periods and loss of capital.

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The way you pay – immediate and deferred annuities

You can buy an annuity with a single premium or make payments over time, on either a regular or discretionary schedule. Your payment alternatives are spelled out in the contract you sign. Immediate annuities, for example, are typically single premium purchases while payments for a deferred annuity may be made over time. Unlike individual retirement accounts (IRAs), to which you must contribute earned income, you can buy a nonqualified annuity with unearned income.

For example, if you sell a business, gain an inheritance, or receive an insurance settlement, you could use that money to buy a single premium contract. Within a variable nonqualified annuity, you can move your assets among different funds during the accumulation period without owing income tax on any gains, as you can within an IRA or qualified retirement plan. There may be a fee for moving assets out of certain types of funds, though, or for transfers over the limit the contract allows.

The Possibilities of Annuities

Qualified or nonqualified

If you participate in a retirement plan where you work, you may find that your employer includes a fixed or variable annuity, or both, in the menu of plan choices. When annuity contracts are offered through a qualified plan they are considered qualified annuities. In this case, qualified means subject to the federal rules that govern how the plans are operated.

Money you contribute to a qualified annuity reduces your current taxable salary in addition to accumulating tax-deferred earnings. But you must begin taking required withdrawals no later than 70½ and take at least the required minimum each year.

Alternatively — or in addition — you can buy an annuity that’s not offered through a qualified plan. In this case, the contract is a nonqualified annuity. Among the key differences are that you pay the premiums with after-tax dollars, you can contribute more than the federal limit for qualified plans, and you can postpone taking income until much later in your life if you wish.

Understanding Different Types Of Annuities. Which One Is The Best? by Inna Rosputnia

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