A contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. The holder is taxed only when they start taking distributions or if they withdraw funds from the account. All annuities are tax-deferred, meaning that the earnings from investments in these accounts grow tax-deferred until withdrawal. Annuity earnings are also tax-deferred so they cannot be withdrawn without penalty until a certain specified age. Fixed annuities guarantee a certain payment amount, while variable annuities do not, but do have the potential for greater returns. An annuity has a death benefit equivalent to the higher of the current value of the annuity or the amount the buyer has paid into it. If the owner dies during the accumulation phase, his or her heirs will receive the accumulated amount in the annuity. This money is subject to ordinary income taxes in addition to estate taxes.

Annuities are much like IRAs with a life insurance component so they do have higher expenses than do IRAs. They also have surrender charges for 7 – 12 years. Because of this higher expense and lack of liquidity, the decision to purchase an annuity should be made carefully. Factors to consider are your age, health, investment and distribution time horizon, and other assets and insurance you already own.