There are many different types of annuities to choose from and there are normally no contribution limits.  Payments from the annuity can be received for your entire lifetime, regardless of how long you may live, plus there is no age limit at which you must begin receiving payments from the annuity.  Taxes are only paid on the earnings portion of annuity payments and at death; proceeds from an annuity pass free from probate to your named beneficiary.

An annuity is a contract between an individual (an “annuitant”) and an insurance company.  The annuitant agrees to pay the insurance company a single payment or a series of payments, and the insurance company agrees to pay the annuitant an income, starting immediately or at a later date, for a specified period of time.  Money put into an annuity grows on a tax-deferred basis until the annuitant begins receiving his or her accumulated fund as an income.  One hundred percent of your earnings are reinvested in an annuity and allowed to grow without having to pay taxes on the earnings. 

Individuals typically use annuities as a supplement to their retirement savings plan because they can guarantee a fixed income stream for life.  Contributions to annuities are made with after-tax dollars and annuities tend to charge high fees that reduce the earnings, they are typically used only after an individual has already contributed the most he or she can to other tax deductible and tax deferred retirement plans.  Examples of the other tax deductible and tax deferred retirement plans include employer sponsored retirement plans and Individual Retirement Accounts (IRAs). 

In addition, individuals can use annuities as a way to receive income from life insurance proceeds, the sale of business property, lottery winnings, an inheritance, a legal settlement, or other sources in the form of periodic payments instead of as a lump sum.  These individuals may prefer an annuity in lieu of another type of investment because they feel they may not be able to manage their money well enough on their own and prefer the certainty of an income that remains constant.  Annuity payments are taxed as they are received rather than taxed all at once, as a lump sum payment would be. In regards to education savings, there are many savings vehicles that offer more advantageous tax benefits than those offered by an annuity.  Since annuities offer tax deferred earnings and unlimited contributions, certain individuals may prefer to use them to complement a family’s other education savings vehicle.  

A charitable gift annuity allows individuals to provide for their own financial security while making a gift to a charity and allows them to enjoy the tax benefits, which accompany it.  A charitable gift annuity is part gift and part annuity contract with the charity.  An irrevocable gift of cash, marketable securities, or other property to the charity is made and in return you receive a fixed income for life in the form of annually, semi-annually, or quarterly payments.  An immediate income tax deduction is received and the annuity payments you receive are tax-exempt to the extent they represent return of principal.  Any portion that represents appreciation is taxable at capital gains tax rates and any portion that represents interest earnings is taxable at ordinary income tax rates.  It’s important for consumers to be aware that a charitable gift annuity is not a trust and the charity guarantees the annuity.  With a trust, the annuity payments are made from trust assets. 

How much money you put into an annuity depends upon your financial goals and the type of annuity you are purchasing.  A traditional annuity should be considered for its ability to build tax-deferred earnings from otherwise taxable investments such as mutual funds and CD’s.  An Equity Indexed Annuity should be purchased for participation in the stock markets while protecting principal from the downside risk. Annuities can help eliminate one of most peoples’ fundamental concerns: outliving their savings.  They offer guaranteed lifetime income payments which will give you the freedom to fulfill your retirement dreams, give financial peace of mind, and flexibility to use your cash however you choose.

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