What an annuity can be designed to do
Annuities are issued by insurance companies. Depending on the contract, they may accumulate value over time, convert assets into a stream of income, or combine accumulation and income features.
Major categories
Fixed
May credit interest according to guarantees and terms stated in the contract.
Fixed indexed
May credit interest using a formula linked to an external market index, subject to caps, participation rates, spreads, and other contract terms.
Variable
Values can fluctuate based on investment options selected within the contract and may involve market risk and additional fees.
Tax deferral is not the same as tax-free
Earnings inside many nonqualified annuities grow tax-deferred, meaning tax is generally postponed until distributions. Tax treatment can be complex and depends on how the annuity is funded and distributed. Discuss tax consequences with a qualified tax professional.
Understand liquidity before you commit
Many annuity contracts have surrender periods, withdrawal limits, and potential charges. Certain withdrawals may also trigger tax consequences or reduce guarantees. Read the contract before purchase.
Common questions
What is an annuity?
An annuity is a contract issued by an insurance company that can be structured to accumulate value, provide income, or both, depending on the product.
Are annuities guaranteed?
Some annuity features may be guaranteed by the issuing insurer, while other values may depend on market performance or a crediting method. Guarantees are subject to the insurer’s claims-paying ability and contract terms.
Can I withdraw money from an annuity?
Many annuities permit withdrawals, but surrender charges, contract limits, market adjustments, taxes, and possible tax penalties can apply. Review the contract and consult a tax professional as appropriate.