Understanding the Basics

What Is An Annuity Investment?

You may be wondering, what is an annuity investment? Well, firstly, an annuity is a financial vehicle that can provide you with recurring fixed payments, guaranteed,* for life. The safety and security offered make an annuity a very different financial strategy than, for example, a stock market investment. This is why, in actuality, some annuity contracts aren’t actually investments at all.

For example, a fixed indexed annuity, or FIA. An FIA is a contract between you and an insurance company. First, you contribute a set amount of money. Then, the accumulation phase begins, during which you gain interest over time. During this phase, your money is set aside in a reserve, meaning your principal is protected by the issuing insurance company. Then, a distribution phase starts, during which you receive payments. Let’s explain this in more detail, to answer the question “What is an annuity investment?”

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Accumulation Phase

Different annuities grow in different ways. An FIA gains interest based on the performance of a stock market index. However, as mentioned previously, your principal isn’t invested directly into the stock market, and is kept protected,* even in the event of a market drop. During the accumulation phase, you simply need to let your money stay put as interest increases over time.

Distribution Phase

Once you actually take the money out of your annuity, the distribution phase begins. One of the benefits of an annuity is the flexibility and the options they provide: You can choose how you specifically receive payments. You can create scheduled payments over a specific term. Furthermore, you can even set a lifetime term. You can specify whether you receive those payments monthly, quarterly, or annually.

Annuities and Taxes

During the accumulation phase, your annuity earnings grow, tax-deferred. In other words, the money gained during that term isn’t taxable. You only pay taxes once you pull the money out. This can be very helpful for those who wish to reduce their current tax liability.

There are other possible benefits, too. You may actually be able to “roll over” the money from your 401(k) into an annuity, in order to reduce the tax burden that a 401(k) would typically entail. 

Of course, you should meet with your tax advisor before making any big tax decisions. However, an annuity may be the perfect product for this purpose.
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We can educate you on them, and answer your questions, such as “what is an annuity investment.”

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