Annuities
are tax-deferred retirement savings
plans, but they’re also insurance policies.
When you purchase an annuity, you sign a
contract with an insurer, agreeing to invest a certain amount
of money. In return, the insurer promises to credit earnings to
your account and agrees to annuitize your account value if you
choose.
Annuitization
means the insurer will return your principal
and earnings to you in regular payments that are guaranteed to
last for the rest of your life. Or, if you prefer, you can withdraw
your money as a lump sum, in a systematic way over a specific
term, such as 10 or 20 years, or as you need it.
Some investors use annuities primarily as
a way to accumulate
tax-deferred
earnings without intending to annuitize. Because they don’t
owe income tax on any earnings the annuity provides until they
withdraw or begin to receive payments, they have the potential
to accumulate a larger account balance than in a taxable account.
Other investors buy annuities as a personal pension, to provide
a stream of guaranteed lifetime income.
