An annuity may be a retirement option

Annuities are contracts between you and an insurance company that are designed to meet retirement and other long-range goals. You make a lump-sum payment or a series of payments and in return,the insurer agrees to made periodic payments to you starting at once or at a future date.

According to a story published by the U.S. Securities and Exchange Commission, annuities typically offer tax-deferrered growth of earnings and may include a death benefit that will pay you or a named beneficiary a specified minimum amount.

Tax is deferred on earnings growth, but when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, not capital gains rates.

Should you withdraw your money early from an annuity, you may pay substantial surrender charge to the insurance company, as well as tax penalties.

There generally are three kinds of annuities: fixed, indexed and variable.

Fixed: The insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The company also agrees that the periodic payments will be by a specified amount per dollars in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime for the lifetime of you and your spouse.

Indexed: The insurance company credits you with a return that is based onchanges in an index, such as the S&P 500. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum regardless of index performance.

Variable: You can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. These kind of contracts are securities and are regulated by the SEC.

Source: U.S. Securities and Exchange Commission