An Individual Retirement Annuity is an insurance product that can be used as part of a retirement strategy. Retirement annuities are a popular choice for investors who want to receive a steady income on retirement. It is like an individual pension plan, where you purchase this insurance policy and it helps you manage savings and income for your retirement.
How An Annuity Works
You are providing an insurance company with your money today, and it then makes payments to you on a future date or series of dates. The income you receive from an annuity can be doled out monthly, quarterly, annually or even in a lump sum payment. The size of your payments depends on a variety of factors, including the length of your payment period. You can opt to receive payments for a set number of years or for the rest of your life. How much you receive depends on whether you opt for a fixed annuity(guaranteed payout) or a payout stream determined by the performance of your annuity’s underlying investments (variable annuity).
Types Of Retirement Annuities
There are two kinds of annuities differed and immediate. Differed annuities accumulate money and immediate annuities pay out.
Immediate Annuity : If you opt for an immediate annuity you begin to receive payments soon after you make your initial investment. Immediate annuities are best for people who are close to there retirement.
Deferred Annuity : If you opt for deferred annuity, contributions are typically made during your working years in exchange for an agreed upon stream of income at a later date, usually upon retirement. Differed annuities are good if a person is farther away from retirement
*Deferred annuities can also be converted into immediate annuities when the owner wants to start collecting payments.
Variable Annuity : When opting for a variable annuity the investor decides how to invest the money. The worth of the account is dependent on the funds chosen. Thus more money can be gained in this form of annuity but the loss is greater as well. This annuity also has the benefit of tax-deferral, but its yearly operating costs are likely to be much higher.
Fixed Rate Annuity : When opting for a fixed rate annuity the responsibility for investing is not placed on the individual but the insurance company, who in return pays the individual a pre-set fixed return.
*The amount supplied to the annuity is not taxed, but the earnings are taxed as regular income.