How Annuities Work in the US

July 9th, 2012 by parentsmarketing Leave a reply »

The world for investors today is an extremely scary place, an endless wave of scandals, poor earnings, market crashes, and the like. New technology has brought the world much closer together, and information is shared and traded with the click of a mouse. Investors the world over can move in unison and affect markets on a single earnings report! It’s enough to keep a large number of potential investors out of the market!

There is, however, an investment product that can lend some stability to all of this chaos: an annuity. For the novice, an annuity is an investment product that is guaranteed to pay a specific amount of interest, on a certain amount of principle, over a specified period of time. These guaranteed earnings are spelled out in the contract, and usually have a “floor” that the earnings cannot go below. For most, the certainty of some type of earnings in today’s climate is worth the trade-off of big market gains that may or may not be made in the stock market. For most annuity holders, the simple piece of mind is well worth the sacrifice of potential gains.

Buying secondary annuities in America today are available in two distinct forms, the immediate annuity and the deferred annuity. An immediate annuity basically involves the investor placing a lump sum investment into the annuity, and immediately taking specified distributions for as long as the funds last. With a deferred annuity, the investor places a lump sum of cash up front for investment into the annuity, or agrees to invest periodic amounts on a regular basis. The funds remain invested in the annuity and earn interest until an agreed upon time at which a lump sum distribution will be taken out, or periodic withdrawals will begin.

Besides offering guaranteed returns, annuities are also the choice for some investors due to their tax status. With a deferred annuity, earnings are not taxed until the time of distribution, at which time the savvy investor will be in a lower tax bracket.


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