An annuity is a contract between an insured and an insurance firm that aims to meet the insured’s retirement and other long-range objectives. The contract entails that the insured makes a lump-sum payment or series of payments to the insurance firm which agrees to make periodic payments to the insured at a certain date, with immediate effect or in the future.
Annuities typically allow an insured to defer tax on earnings growth, and may bear certain benefits (e.g., death benefits to named beneficiaries). Withdrawals that may be taken from the annuity, growth gains will be taxed at ordinary income tax rates (rather than at capital gain rates).
Early withdrawals from an annuity make expose an insured to payment of large surrender charges to the insurance company, in addition to certain tax penalties.
Annuities take many forms including indexed annuities, fixed annuities and variable annuities.
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