Annuities are insurance contracts, offered by insurance companies, but sold through licensed agents, created when one pays the insurance company, allowing the money to grow tax deferred and then distributed back to the owner in a variety of ways. One of the key benefits of annuities is the increased control over taxes that they provide. There are actually two types of annuities. Immediate and Deferred annuities.
Immediate Annuities: Basic difference between the two types of annuities is when the income payments start. With immediate annuities the payments start within the first twelve months of purchase. Your income payments can be setup with a fixed rate or a variable rate. Obviously, the fixed rate will provide income at a set amount. The variable rate immediate annuity will vary based on the performance of the specific investments the annuity is tied to. Annuities are a great complement to an employer-backed retirement plan such as a 401k.
Deferred Annuities: There are two phases to a deferred annuity. During the first your money sits and accumulates tax free, until you take it out. The second phase is when your payout starts. Typically this is done during retirement. There are withdrawal options as well. You can withdraw all your money as a lump sum or, like the immediate annuity, as income payments.