An annuity is basically a contract sold by an insurance company that invests your premium for future growth. Once you’re ready to withdraw money–usually for retirement income–the insurance company will distribute regular payments.

A deferred annuity allows all earnings to grow tax deferred, which means you don’t have to pay taxes on them until you withdraw the money. At that time, you pay your ordinary income tax rate, but only on the portion of each payment that is considered earnings–not your original principal.

There are several different types of annuities, ranging from those that can provide an immediate income stream to those that offer unlimited long-term growth potential:

Immediate Annuity
If you’re ready to retire and have a lump sum of money, an immediate annuity can guarantee you immediate income that will last throughout your lifetime.

Fixed Annuity
This is a safe haven that can preserve your principal, offer a fixed rate of growth, and guarantee you income upon retirement.

Variable Annuity
Variable annuities offer maximum growth opportunities and an abundance of self-directed investment options.

Variable Annuity Advantages & Disadvantages
While an annuity offers a unique combination of advantages that you can’t find in any other type of investment, it doesn’t come without a price or without pitfalls.