Saturday, June 4, 2011

What is an Annuity?

In  the realm of our capitalist society there is no shortage of financial products for consumers. One of these is an "Annuity Contract".  An annuity is simply a contract which you purchase for a lump sum payment. In return the company that issues the contract invests your money into a wide array of investment choices, depending on your degree of risk acceptance. The idea is that at the end of that contract you can either receive monthly payouts (typically for a five year period), a lump sum distribution or in some cases you can roll over your investment into another contract.  As far as taxes are concerned, the amount of money you paid for the contract is not taxable, only the earnings that are distributed become taxable.  Annuities give you the benefit of professionally managed investments. For example your funds could be invested  into some kind of mutual fund or a variety of funds, and index, or some emerging market fund.  A well planned investment typically fetches a higher yield than you would get in a savings account or a bank CD.  Again there are many variations of annuities so you really need to define your investment goal. 

Annuities are typically a financial product sold by CFP's , (Certified Financial Planners) and other investment advisors. However, there are a number of different ways to buy annuity contracts.

Talking to your CPA on a yearly basis is an opportunity for ideas, to establish financial goals and learn about financial products.

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