CDs have been the investment of choice for a long time. While CDs offer security, they have the disadvantage of earning a low return on investments. Annuities offer the security of CDs without the downside of low return rates. You can invest large sums of money in both CDs and annuities, but annuities will earn much better interest rates, especially over the long term.
What is an Annuity?
Simply put, an annuity is an agreement (contract) you sign with an insurance company. You promise to invest your money into an annuity, and the insurance company promises to add interest to that money according to the specific instructions set forth in the contract. You can begin receiving payments right away if you choose an immediate annuity, or wait until a specified later date. The annuity grows tax-free until you begin withdrawing payments.
Once you take money in payments, you have “annuitized.” Several payment options are available once you choose to begin annuitizing. You can receive money for a set period of time, or for the rest of your life or your spouse’s life. If you just want an addition to your retirement income, you can take payments after you retire.
Annuities, Taxes, and You
When it comes to earning interest on investments, the IRS is always on your mind. A great advantage with annuities is that your money grows tax deferred until you choose to annuitize (withdraw funds). Once you begin receiving payments, you are only taxed on the money you withdraw at your normal income tax rate. You may find yourself in a lower tax bracket than when you worked, if your retirement payments are less than your salary. Here are a couple of important points to consider about annuities and taxes:
1. Whether you are receiving payments from your
annuity or adding funds to the account, any income you withdraw is taxed at your normal income tax rate.
2. Any money withdrawn before age 59 ½ causes a 10% IRS penalty.
What is the Difference Between a Life Insurance Policy and an Annuity?
Life insurance pays a death benefit to your survivors upon your death.
Annuities pay income for life. While annuities can include a death benefit, it does not work quite the same way as a life insurance policy. Death benefits with annuities are valid only during the accumulation phase. Once this phase ends, the death benefit expires.
Categories
Editors' Choice
