Investor's Manual: What Is An Annuity?

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An annuity is a contract between an investor and insurance company designed to provide a steady income stream to the investor, usually after retirement. Annuity investors pay regular premiums to the insurer, then, once the contract is ‘annuitized,’ the investor receives regular payments for a set period of time. Annuities can grow tax-deferred, meaning investors pay no taxes on the earnings until they receive payments or make withdrawals.

Like pension plans and Social Security, annuities offer the potential for lifetime income, which you could use to help meet your everyday needs in retirement. This steady stream of money could supplement your 401(k) or IRA savings and potentially free up the money in those accounts for other things such as travel or unexpected expenses. The payments are usually made monthly, and the amount you receive depends on many factors, including your account balance, life expectancy, and the type of annuity you select.

Time to Hit the Market?

Knowing when you want annuity payments to begin may help you narrow down your choices. If you want to start receiving income right away, an immediate annuity might make the most sense for you. With a deferred annuity, you purchase it now, and the payments start at a designated date in the future. This means your money has an opportunity to grow tax deferred. You don’t pay taxes on any earnings until distributions begin.

To learn more about planning for retirement, watch this video.

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Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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