By developing a contract that only involves you and an insurer, you have successfully established an annuity. You agree to pay a current premium, either up front or in intervals, and the insurance company provides a minimum rate of return and consistent income for the future. This income can be paid in intervals or grow tax deferred for a period of time before it is disbursed.

Immediate/Deferred Fixed Annuities

An immediate annuity provides you with payments roughly a month after you pay the entire premium. In addition to payments over time, an immediate annuity offers some tax relief. The interest is subject to income taxes, which are incrementally assessed; however, the principal is not taxed because it is simply repaying your premium.

A deferred annuity provides you the opportunity to not only pay the premiums at varying amounts but also choose when to receive your payments. If you do not touch the accrued income and allow it to accumulate, you will earn more when compared to an immediate annuity. Why? Because your income, including the interest, is tax deferred until you choose to receive the payments from the annuity.

Because annuities are geared toward providing income for retirement, these financial planning instruments are potentially subject to a 10% early withdrawal penalty fee if your age is less than 59 1/2 and surrender fees on top of income taxes.

This information is presented to educate the reader and does not constitute professional tax and legal advice.

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