Types of Annuities

by Ben Bontekoe

Overview

An annuity is a contract with an insurance company. You make one contribution, or a series of contributions, and the insurer guarantees you regular payments in retirement, usually for the rest of your life.
Types

Fixed annuities pay a guaranteed interest rate for a specified period, similar to a CD. Variable annuities are invested in stocks and bonds and offer greater risk with the possibility of greater returns.

Function

Annuities provide guaranteed income for you or you and your spouse for life, or another period you specify. You can purchase an annuity with one lump-sum payment, or gradual payments over time.
Benefits

Investment earnings in annuities grow tax-deferred. You don't have to pay taxes on earnings until you withdraw money in retirement.
Considerations

If you plan to be in a higher tax bracket in retirement, or if annuity fees will outweigh the tax benefits, you may want to consider a different retirement vehicle.
Warning

If you withdraw money from an annuity before age 59 1/2, you will likely face a 10 percent IRS penalty, in addition to surrender fees the insurer may charge.