Annuities

Annuities are another retirement savings option that you may want to consider. Annuities are insurance company products that let you accumulate tax-deferred earnings and then convert your account value to a source of income. You pay premiums, or cash payments, to the insurance company — either in one lump sum or in regular payments over time. You usually can't withdraw without penalty before you turn 59 1/2.

Annuities are available in many varieties. Some people use them to accumulate assets for their dependents, but most frequently they're used to supplement other retirement savings plans. Other people buy an annuity as a source of immediate income.

Deferred annuities:

• Can be a way to save for future needs
• There's an accumulation phase, when you put money into the contract
• When you're ready to retire, there's a payout phase when your account value is converted to a stream of income or you make some other withdrawal arrangement

Immediate annuities:

• Appropriate if you'd like to receive income right away
• May be purchased with a pension payout, proceeds from the sale of a business or an inheritance
• Provides income that begins as soon as you sign the contract and pay the premium

The annuity you choose will also depend on the return you'd like and the amount of risk you are willing to take. The choice here is between a variable and a fixed annuity.

• If you choose a variable annuity, the rate at which earnings accumulate in your account depends on the investment performance of the funds, called subaccounts, you choose from among those the annuity offers. You'll earn more when they're doing well, and less when they're doing poorly.

• A fixed annuity, on the other hand, offers you the same rate of return each month for a specific term.

You can also choose an annuity as part of a qualified retirement plan or decide to buy a nonqualified annuity with other savings.

• A qualified annuity is one that you purchase through your 401(k) or other employer plan. Your contributions are made with pretax dollars and are subject to contribution limits and withdrawal requirements.
• An individual retirement annuity resembles a traditional IRA in most ways, such as contribution limits and withdrawals requirements. The difference is that you purchase an annuity rather than CDs or mutual funds. You may qualify to deduct your contribution when you file your tax return.

• A nonqualified annuity is one you purchase on your own, often when you've contributed as much as you can to an employer's plan or an IRA. Unlike 401(k)s or IRAs, there are no contribution limits and you're not required to begin withdrawals at 70 1/2. In this case, you contribute after-tax income.