An annuity is a contract between you (the purchaser or owner) and an insurance company. In its simplest form, you pay money to an annuity issuer and the issuer then pays an income stream back to you or a named beneficiary. Annuities are generally used to provide income in retirement.
If you buy an annuity with pretax money, then the entire balance will be taxable. If you use after-tax funds, however, then you will be taxed only on the earnings. If you cash out a deferred annuity in a lump sum, then you will have to pay income taxes on all of the earnings higher than your original investment.
Most life insurance companies sell annuities. You pay the insurance company a sum of money either all at once or incrementally. The type of annuity you own determines whether your money earns a fixed amount or an amount that depends on the equities in which the annuity is invested. At a designated time chosen by you, the insurance company generally begins to send you regular distributions from the annuity's account. Or, you may be able to withdraw the money over time or in one lump sum.
There are many different kinds of annuities. Four of the most common types are:
- Single premium immediate annuity
You pay the insurance company a lump sum now and begin to receive withdrawal distributions for a period of time you specify. The amount you receive will vary according to the length of time the payments are to last and whether anyone will receive the remaining balance at your death.
- Single premium deferred annuity
You pay the insurance company a lump sum now and defer receiving withdrawals until later. The amount of distributions will depend on the value of your account at the time your payments begin, the length of time the payments are to last and whether anyone will receive the remaining balance at your death.
- Additional premium deferred annuity
You send money to the insurance company usually monthly, quarterly or annually. You defer your withdrawals until a later date.
- Variable annuity
This type of contract is a vehicle for equity investments. You can do a one-time deposit or contribute throughout the life of the contract. You can choose how your money is invested in an offering of investment portfolios and you may invest conservatively or aggressively. The growth of your account value will vary depending on your choice of investments.
If you think you may need more retirement income than your current retirement plan will provide and you’re making the maximum allowable contributions to your retirement plans, then an annuity might be a good choice for you. Schedule a no-obligation consultation with a CFS Financial Advisor at Denali Investment Services today.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/ SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.
For specific tax advice, please consult a tax professional.
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