Understanding Fixed Annuities
Having enough money for the retirement lifestyle you want is usually best accomplished by using all the financial tools at your disposal. Your retirement plan and IRA can provide the foundation for that nest egg. Another tool you may want to consider is a fixed annuity.
What is a Fixed Annuity?
A fixed annuity is a contract issued by a life insurance company under which you give the insurance company a sum of money and the insurance company guarantees to pay you periodic fixed amounts over time. The earnings within the annuity accumulate on a tax-deferred basis until you begin to receive withdrawals. With a fixed annuity, the insurance company usually guarantees a rate of return for some period with the rate being adjusted after an initial period.
Most people use fixed annuities to accumulate funds on a tax-deferred basis as part of their retirement planning strategy. Depending on the policy, withdrawals of interest, or in some cases up to 15% of the principal can be made without penalty. Withdrawals are subject to regular income tax and the IRS imposes a 10% penalty tax if funds are withdrawn before age 59 ½.
There are also annuities that offer payouts beginning immediately. Variable annuities are somewhat similar but offer no return guarantees.