Annuities

Annuities are insurance products that provide a source of monthly, quarterly, annual, or lump-sum income during retirement. An annuity makes periodic payments for a certain amount of time, or until a specified event occurs (for example, the death of the person who receives the payments). Money invested in an annuity grows tax-deferred until it is withdrawn.

Unlike an IRA, which typically can have only one owner, an annuity can be jointly owned. Annuities also do not have the annual contribution limits and income restrictions that IRAs have. There are a variety of annuities. You can fund an annuity all at once (known as a single premium) or you can pay into it over time.

With an immediate payment annuity (also called an income annuity), fixed payments begin as soon as the investment is made. If you invest in a deferred annuity, the principal you invest grows for a specific period of time until you begin taking withdrawals—usually during retirement.

As with IRAs, you will be penalized if you try to withdraw funds from the deferred annuity early before the payout period begins.

Because an annuity is basically an investment instrument inside an insurance policy, fees can be high. You pay fees for the insurance, management fees for the investments, fees if you try to get out of the contract (aka surrender charges), and fees for riders. These are optional additions to the basic contract, such as one that guarantees a minimum increase in annuity payments each year.