Annuity terms can be confusing. Here is an overview of how annuities are compared among each other and the meaning of terms used.
All annuities are contracts with insurance companies. 'Annuity' refers any contract that makes available an amount of money every year (or month) beginning at a certain time. Typically, you may buy an annuity - i.e. an annuity contract - with an insurance company for saving your money into the contract until such time that you want the insurance company to pay you back your savings annually (usually on a monthly basis) for life or for a fixed term - i.e. until you annuitize the contract.
According to federal taxation rules, all earnings in annuities grow tax-deferred. But all untaxed earnings are taxed as income when received. Withdrawals before you turn 591/2 carry a 10% penalty tax.
While you're saving and growing your money in your annuity, your annuity contract is in its accumulation phase and, therefore, called a deferred annuity. The annuity is annuitized during its payout stage.
Fixed annuities are typically invested in bonds. During the accumulation phase, interest earnings are fixed - often for a year at a time. During the annuitization phase, fixed annuities pay a constant monthly amount.
Variable annuities are invested in equity-based funds. So, earnings will vary with the performance of those funds. During annuitization, they will produce varying payouts to you.
Indexed Annuities are invested in bonds, too. But they offer increased earnings based on increases in an associated equity index ascribed to that annuity.
An immediate annuity is designed to be annuitized soon after it's purchased so there's no accumulation phase. It's bought with a single (large) premium that will supply a specific yearly payout as its annuitization.
You often can contribute to deferred annuities over time with flexible premium payments to suit your circumstances.
Qualified annuities are part of government retirement plans and regulations - like IRAs. So they must conform to regulations about contributions and payouts that most qualified retirement plans do. As a result your contributions to your qualified annuity contracts are tax-deductible but annually limited to some amount based that generally increases with inflation. They also have minimum required distributions (MRDs) after you reach 701/2. So your annuitization must begin then. Everything coming out of the annuity is taxed as ordinary income.
Most annuities, though, are nonqualified. In that case they allow unlimited after tax contributions that you can make each and every year. Their earnings within the contract grow tax-deferred, and under annuitization, only those earnings are taxed as ordinary income; the withdrawal part coming from your after-tax contributions comes out tax free since they represent your tax basis in the contract investment.
Lastly, realize that annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 1/2 are subject to a 10% penalty. Income from annuitization is taxed part as ordinary income and part as return of capital.
Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuities are insurance products and subject to insurance related fees and expenses.
All annuities are contracts with insurance companies. 'Annuity' refers any contract that makes available an amount of money every year (or month) beginning at a certain time. Typically, you may buy an annuity - i.e. an annuity contract - with an insurance company for saving your money into the contract until such time that you want the insurance company to pay you back your savings annually (usually on a monthly basis) for life or for a fixed term - i.e. until you annuitize the contract.
According to federal taxation rules, all earnings in annuities grow tax-deferred. But all untaxed earnings are taxed as income when received. Withdrawals before you turn 591/2 carry a 10% penalty tax.
While you're saving and growing your money in your annuity, your annuity contract is in its accumulation phase and, therefore, called a deferred annuity. The annuity is annuitized during its payout stage.
Fixed annuities are typically invested in bonds. During the accumulation phase, interest earnings are fixed - often for a year at a time. During the annuitization phase, fixed annuities pay a constant monthly amount.
Variable annuities are invested in equity-based funds. So, earnings will vary with the performance of those funds. During annuitization, they will produce varying payouts to you.
Indexed Annuities are invested in bonds, too. But they offer increased earnings based on increases in an associated equity index ascribed to that annuity.
An immediate annuity is designed to be annuitized soon after it's purchased so there's no accumulation phase. It's bought with a single (large) premium that will supply a specific yearly payout as its annuitization.
You often can contribute to deferred annuities over time with flexible premium payments to suit your circumstances.
Qualified annuities are part of government retirement plans and regulations - like IRAs. So they must conform to regulations about contributions and payouts that most qualified retirement plans do. As a result your contributions to your qualified annuity contracts are tax-deductible but annually limited to some amount based that generally increases with inflation. They also have minimum required distributions (MRDs) after you reach 701/2. So your annuitization must begin then. Everything coming out of the annuity is taxed as ordinary income.
Most annuities, though, are nonqualified. In that case they allow unlimited after tax contributions that you can make each and every year. Their earnings within the contract grow tax-deferred, and under annuitization, only those earnings are taxed as ordinary income; the withdrawal part coming from your after-tax contributions comes out tax free since they represent your tax basis in the contract investment.
Lastly, realize that annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 1/2 are subject to a 10% penalty. Income from annuitization is taxed part as ordinary income and part as return of capital.
Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuities are insurance products and subject to insurance related fees and expenses.