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What is an Annuity?

According to annuretirement.com, more than 10,000 baby boomers, on average, turn 65 each day. Thus, more and more people are trying to plan for their financial futures and find different ways to do so. One such way that is not as well-known as an IRA, Roth IRA or 401(k) is an annuity. According to the Investment Company Institute, annuities account for only 8% of all assets earmarked for retirement, however, individuals hold about $2.3 trillion in annuity contracts and $9.2 trillion in IRAs.


What is an annuity? Annuities are contracts with insurance companies. In exchange for a premium or a series of premiums, the insurance company agrees to make regular payments to the contract holder to use immediately or in the future. With an annuity, you can receive payments monthly, quarterly or annually. You can set up these payments to receive them for a set number of years or for the rest of your life.

Unlike other retirement plans, annuities have no contribution limits. For example, the contribution limit for both a traditional and Roth IRA is $6,000 a year. But, with an annuity, you can contribute as much as you want.


The money held in an annuity contract grows tax deferred. When you withdraw the money from it, the amount contributed is not taxed, but the earnings are taxed as regular income. On the other hand, if you use annuity earnings to pay for long-term care insurance, you do not have to pay income tax on the earnings.


The two main types of annuities are fixed and variable. Fixed annuities offer a guaranteed payout, typically a set dollar amount or a percentage of the assets in the annuity. They can help enhance your income and have lower risk since there is no exposure to the stock market. You can purchase a fixed annuity in 3, 5 or 7 year terms.


Variable annuities provide investment flexibility and growth potential giving annuity owners the possibility for higher returns. You can choose from multiple investments to customize your retirement strategy. However, a variable annuity may fluctuate in value and be more of a risk than a fixed annuity.

To learn more about annuities and how they can add value to your retirement plan, please call Private Wealth Manager Ken Smith at (301) 733-7777.


Fixed and variable annuities are suitable for long-term investing, such as retirement investing. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

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