Tell Me About Annuities

By Hersh Stern - Revised Saturday, June 8, 2024

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Annuities offer investors a number of features and benefits, including the following:

  • Longevity protection- providing a guaranteed income stream for life
  • Security- many annuities offer guaranteed interest rates, protecting your portfolio against market downturns
  • Tax Deferral- Premiums deposited into annuities grow on a tax deferred basis; taxes are paid upon withdrawal

Q: What are the primary types of annuities?
A: There are two primary types of annuities: deferred and immediate. Premiums deposited into an immediate annuity are typically converted immediately into an income stream that begins within 30 days. Premiums deposited into a deferred annuity can be turned into an income stream at a pre-determined future date or kept in the accumulation portion of the product where they will continue to grow on a tax-deferred basis. You can withdraw the principal plus earnings penalty-free from a deferred annuity once surrender charges expire.

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Q: How do I know if an annuity is right for me?
A: Annuities offer a number of benefits for investors in all stages of the financial life cycle. One of the biggest benefits offered by annuities is risk transfer. Another significant benefit is protection, whether in the form of lifetime income (also referred to as longevity insurance) or death benefit. When searching for an annuity contract that meets your specific needs, be sure to consider your current household expenditures, annual income required during retirement, total investable assets, state of your health and your life expectancy and your present portfolio allocation. Once you determine how you need an annuity to function for you, research products and compare payouts, rates, and fees amongst several top insurance companies.

Q: Do annuities offer me any tax benefits?
A: Generally, yes. You don't owe taxes on interest earned within a deferred annuity until those earnings are withdrawn. Premiums deposited into annuities accumulate on a tax-deferred basis.

Q: Should I fund my annuity using IRA dollars?
A: The answer to this question isn’t a simple ‘yes’ or ‘no’. Retirees who are seeking guaranteed income streams in addition to preservation of principle may benefit from utilizing all of part of their qualified investment portfolio to fund an annuity. One important consideration is that you will not benefit from tax deferral offered by an annuity as your qualified plan already captures that financial benefit. However, as an IRA holder you may be drawn to an annuity for its income protection opportunities (i.e. lifetime income) and enhanced death benefit riders.


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