As I said before I really do appreciate the insight provided with Kiplinger’s Personal Finance Magazine. Below is a portion of an example written by Kimberly Lankford.
. . . For starters they come in two varieties: Immediate-income annuities provide income right away; deferred annuities allow investors to save for retirement while deferring taxes.
With an immediate-income annuity, you give an insurance company a chunk of money in exchange for the insurer’s promise to send you regular payments for the rest of your life, or for a certainperiod of time. Immediate annuities can be an appropriate and simple way to invest some of your nest egg while you’re in retirement.
Deferred annuities, on the other hand, are complex investment products. Besides surrender charges, some charge annual fees that can top 2%, plus the management charges of the underlying investments.
The most common type of deferred annuities is a variable annuity, which lets you choose from among several mutual fund-like accounts. The value of your accounts rises and falls with the performance of those funds. An quity-indexed annuity is an exotic variation of deferred annuity that ties returns to stock-market indexes.
A deferred annuity offers tax benefits similar to those of a traditional non-deductible IRA. You don’t owe taxes until you begin making withdrawals, which are then taxed as ordinary income. Deferred annuities became much less appealing when the tax rate on capital gains dropped to 15% (or lower), in 2003, making it more attractive, tax-wise, to simply invest in stocks and mutual funds.