Prior to the late 1970s annuities were primarily used as a retirement income vehicle. The textbook definition of an annuity in those days was “A periodic income for a specified length of time, for life, or a combination of the two.” Today, however, annuities can mean much more.
Fixed And Variable Annuity Differences
The differences between variable annuities and fixed annuities are significant. In a variable annuity, because your income or account value is based on the value of the stocks or bonds backing the annuity assets, the income and/or account values fluctuate. When you read or hear about annuities in the media, most of the time the subject is VARIABLE annuities NOT FIXED annuities.
Unlike with fixed annuities, the annuity owner bears the investment risk with variable annuities. Therefore, variable annuities are considered investment securities and would be a “risk money place” for your money.
Fixed annuities provide a guaranteed minimum interest rate and are considered savings instruments. Insurance companies issue all fixed annuities. They are not government or bank obligations, so naturally they are not FDIC insured. However, fixed annuities have an extraordinary record of safety and offer other benefits.
Annuities Can Provide:
Money remaining inside an annuity grows without being taxed until withdrawn. Unlike qualified retirement accounts where you must begin taking out money around age 70, most annuity contracts permit the owner to enjoy the advantage of tax deferral until age 85, 90, or even later. Tax deferred does not mean tax-free; interest is taxed when withdrawn. Also, the Treasury Department charges a 10% penalty on interest, in addition to regular taxes, if withdrawals are made before age 59.
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