An annuity is an insurance contract that provides periodic payments
(fixed or variable) for life or for a defined period of time. Annuity
earnings are tax-deferred. Unlike 401k or traditional IRA, annuities
typically do not have a limit on how much you can invest each year.
However, because of the typical sales and insurance charges occurred
with annuities, it might be more efficient to invest in IRA. However,
if you have already maxed out your contributions to other tax-deferred
or tax-free accounts, annunities can be considered. As a rule, in
order for the tax-deferral advantage to outweigh the higher costs
associated with variable annuities, an investment usually must remain
in the annuity for at least 10 years.
There are fixed annuity and variable annuity.
With a fixed annuity, you invest an amount of money, and
the insurance company makes a series of payments to you for a number
of years or for your lifetime.
With a variable annuity, you choose how to invest the money;
the amount you receive later depends on the investments you chose.
This has the accumulation phase and the distribution phase. For
accumulation, you can establish a qualified annuity by transfering
money from a qualified retirement savings plan such as 401(k) or
IRA. Such a transfer is tax-free. Or you can establish a non-qualified
annuity by directly contributing money to the account. For distribution,
federal tax law requires that you begin taking money out of a qualified
annuity soon after you turn 70-1/2. For a non-qualified annuity,
federal tax law has a limit on how much you can invest, and you
do not have to begin withdrawals until you reach 85. The transfer
from 401k and IRA accounts to an annuity is tax-free.