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Annuity basics

Types of Annuities

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Annuities vs. Traditional Investments

There are quite a few differences between annuities and other, traditional, investments:

No Annual Limit on Deposits

Annuities allow you to contribute as much money as you would like to your investment throughout the year unlike traditional IRAs, 401(k), or 403(b) plans that set an annual limit based on year and age.
Most experts agree that you should not buy an annuity unless you are fulfilling your annual maximum contributions to your retirement plan.

Tax Deferred Growth

Annuities allow for tax-deferred financial growth, meaning that you are not taxed on the money until it is disbursed to you. Even then you are only taxed on your gains, not the initial investment.

Lifetime Income Payments

Here is a tricky one. Some types of annuities, not all, have the option for a lifetime income payment guarantee. These annuities are fixed, meaning you are on a specific monthly payment schedule that will not change for the rest of your life, once you start receiving payments. This is a good choice if you are looking for stability and anticipate out-living your retirement fund. With this type of annuity you are guaranteed payments as long as you live but you absolutely cannot ever take out a lump sum remainder of your annuity.
With an IRA, 401(k), or 401(b) you are not guaranteed payments for life and you could run out of money. However, once you reach a certain age you do have the option to withdraw the lump sum remaining in your account.

Death Benefits

Death benefits are included in most annuities unless you choose a straight life annuity, in which case it will only pay out for your own life span. You can choose an annuity that upon your death will pay out for the remainder of your spouse's life, another will payout for a specific period of time whether it is to you or your beneficiaries, or one that pays a lump sum to your beneficiaries upon your death. The payouts after your death are based on what you chose when you set up the annuity and your beneficiary is required to pay taxes only on gains as you would.

For more information on Annuity settlement options click here.

With traditional investments, your spouse (or chosen beneficiary) is guaranteed to receive the remainder of your payments until the account is dry. Your beneficiary would be required to pay taxes on the payout amounts they received.


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