Annuities generally fall into two categories: deferred and income. Each works differently and offers unique advantages.
Tax-deferred annuities: for retirement savings
Deferred annuities can be a good way to boost your retirement savings once you've made the maximum allowable contributions to your 401(k) or IRA.1 Like any tax-deferred investment, earnings compound over time, providing growth opportunities that taxable accounts lack.
Deferred annuities have no IRS contribution limits,2 so you can invest as much as you want for retirement. You can also use your savings to create a guaranteed3 stream of income for retirement. Depending on how annuities are funded, they may not have minimum required distributions (MRDs).
Bear in mind that withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty. Annuities also come with annual charges not found in mutual funds, which will affect your returns.
Deferred variable annuities have funds that may have the potential for investment growth. However, this can involve some market risk and could result in losses if the value of the underlying investments falls. Variable annuities are usually appropriate for those with longer time horizons or those who are better able to handle market fluctuations. Some variable annuities allow you to protect your investment against loss, while still participating in potential market growth.
Deferred fixed annuities offer a guaranteed3 rate of return for a number of years. Fixed deferred annuities may be more suitable for conservative investors or for those interested in protecting assets from market volatility. In this way, they’re similar to certificates of deposit (CDs).
However, deferred fixed annuities differ from CDs in that:
- Annuities are not FDIC-insured.
- Withdrawals from annuities prior to age 59½ may be subject to a 10% IRS penalty.
- Deferred fixed annuities may offer more access to assets than a CD.
- Annuity earnings compound on a tax-deferred basis.
Income annuities: for income in retirement
Income annuities may be appropriate for investors in or near retirement because they offer guaranteed3 income for life or a set period of time. They may allow you to be more aggressive with other investments in your portfolio, since they provide a lifetime income stream.
Keep in mind that you may have limited or no access to the assets used to purchase income annuities.
Immediate variable income annuities offer an immediate income stream with growth potential, which may help keep pace with inflation. This income is guaranteed3 for life, but the amount of each income payment is not guaranteed—the payment amount will vary based on the performance of the annuity's underlying investments.
Immediate fixed income annuities offer a guaranteed,3 predictable payment for life, or for a certain period of time. Your guaranteed income payment cannot be affected by market volatility, helping shield your retirement income from market risk.
A cost-of-living increase is available at an additional cost to help your buying power keep pace with inflation.
Deferred income annuities4 are fixed income annuities that have a deferral period before income payments start. Because of the deferral period, you may get a higher income payment amount than you would from a comparable immediate fixed income annuity with the same initial investment. The cost-of-living increase is also available at an additional cost for deferred income annuities.
Living benefit annuities: for investment protection, income generation, and growth potential
For retirement and other savings goals, many people may be looking to obtain some level of asset protection. These annuities can provide a benefit other than just tax deferral. People nearing or in retirement may be looking to establish downside protection for the long term but still want to participate in the market.
Some deferred variable annuities with guaranteed3 living benefits provide both guaranteed lifetime income and growth potential, and may offer access to assets5 as well. In fact, if the account's investments perform well, the income payments may increase.6 Those increases are also protected from any later market declines.5
Another type of living benefit is one that protects your savings from market downturns while still allowing you to participate in the market’s potential upside. These types of accumulation annuities provide a minimum downside protection, for example, your initial investment amount, while investing in a diversified portfolio that includes equities for portfolio growth over time.