In its simplest form, an annuity provides a guaranteed stream of income to cover a lifetime, or a specified period of time. Payments can start now with an immediate annuity, or sometime in the future with a deferred annuity (in the meantime, you pay no tax unless you make withdrawals). Both immediate and deferred annuities come in two flavors: They can be fixed, with unchanging payment amounts, or variable, which means payments are based on the performance of an investment—typically mutual funds.
Here comes the confusing part: Many annuities—particularly the variable variety—offer a dizzying array of add-on features. Extras—which include death benefits, guaranteed rates of return, and long-term care benefits—often come at a steep premium, so it pays to eyeball fees closely. Aside from fees, there are plenty of moving parts to consider when it comes to annuities, including policies, investment options, and tax treatments.
Annuities, which are contracts between a buyer and an insurance company, can be purchased from insurance providers, banks, mutual fund companies, and other financial institutions. Not surprisingly, much of the research online is sponsored by these sellers. Fidelity's annuities page, which was designed based on feedback from focus groups, includes calculators, quizzes, and short videos explaining the mechanics of annuities. CCH, a provider of tax and business information, offers calculators for immediate annuities and variable annuities.
If you'd rather hear it directly from Uncle Sam, the Securities and Exchange Commission offers some basic annuity information, including a brochure focused on variable annuities. Here, the SEC cautions investors of the perils of holding variable annuities through tax-deferred accounts such as a 401(k) and IRA. "In that case investors could be paying a significant premium for a benefit they do not need, since a 401(k) account already provides tax deferral," says Rudy Aguilera of Helios, an Orlando investment advisory firm.
AARP offers another comprehensive guide to variable annuities. Here, the Insurance Information Institute includes information on how annuities are sold, and lists the top providers.
