A great investment, but so misunderstood! This page will summarize the most important features of annuities and give you links to more information. Spend five minutes on this page and you’ll know whether you should spend more time investigating annuities. For more information on these topics, check the box on the right.

Is an Annuity Right for You?

Two of the most important reasons why people buy annuities are:

1. While they’re saving for retirement they buy annuities to defer taxes—perhaps enabling them to save more than with taxable investments such as mutual funds. If you’re saving for retirement, an annuity may be right for you, especially if you’ve already exhausted other alternatives such as IRAs,401(k)s, and 403(b)s. Annuities are especially appropriate as a long-term investment alternative to mutual funds.
   
   
2. Once you retire, an annuity can generate monthly income as long as you live. With life expectancies increasing and the length of retirement growing, income for life can be a very attractive feature.

Fixed vs. Variable

The distinction between fixed and variable annuities is one that often confuses investors.

Fixed annuities are often associated with the payout stage, and variable annuities are more often associated with the savings or accumulation phase. However, both types of annuities may be used to save for retirement, and both types may be used to generate monthly payments once you retire.

With a variable annuity the payout varies depending on the investment returns of the funds you chose. Fixed annuities provide fixed payments or payments that vary based on a predetermined formula.

Subject to important differences, variable annuities are similar to mutual funds in that their values will fluctuate with the market. Fixed annuities offer a more conservative approach for those unwilling to take on market risk.

Annuity Taxation

The most important thing to remember about annuity taxation is that as long as you don’t take money out, there are no tax consequences for having an annuity. Not only are taxes not due during the accumulation phase, but you don’t have to report the annuity on your tax return at all. (No 1099 forms!) When you make withdrawals or begin the payout phase, you’ll begin getting 1099s.

Two other important points regarding taxation:

• Whether you’re in the payout or accumulation stage, any income you actually receive from an annuity is taxed as ordinary income rather than as capital gains.

• If you withdraw money prior to age 591/2, you may be subject to an IRS tax penalty of 10% of the accrued earnings.

Annuities and Other Retirement-Oriented Investments

Even if you’re not yet an annuity expert, you’re probably familiar with other types of investments that can be used to save for retirement or provide income during retirement.

The following chart compares different types and forms of investments and retirement-oriented financial products. We assume that an "outside" annuity or "outside mutual fund" is not part of any 401(k) or IRA.

Equity Index Annuities

What are Equity-Indexed Annuities?

It is a fixed annuity, either immediate or deferred, that earns interest or provides benefits that are linked to an external equity reference or an equity index. The value of the index might be tied to a stock or other equity index. One of the most commonly used indices is Standard & Poor's 500 Composite Stock Price Index, which is an equity index. The value of any index varies from day to day and is not predictable.

When you buy an equity-indexed annuity, you own an insurance contract. You are not buying shares of any stock or index.

While immediate equity-indexed annuities may be available, this guide will focus on deferred equity-indexed annuities.

How Are They Different From Other Fixed Annuities?

It is different from other fixed annuities because of the way it credits interest to your annuity's value. Some fixed annuities only credit interest calculated at a rate set in the contract. Other fixed annuities also credit interest at rates set from time to time by the insurance company. Equity-indexed annuities credit interest using a formula based on change in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity.

The annuity, like other fixed annuities, also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum.

Things to Consider in Choosing an Annuity

Once you’ve decided an annuity may be right for you and chosen the basic type of annuity—fixed or variable, accumulation or payout—you’ll have to choose among many different annuities from hundreds of companies. We’ve made the process a lot simpler by gathering some of the best annuities, both variable and fixed, from leading annuity providers.

Some of the most important things to look for include:

Fees and expenses

What is the asset charge?
How about fund fees?
Is there a surrender charge?
Are there other expenses?

Fund Choices

How many funds can you choose from?
Are you allowed to switch funds without Expense?
Are these the funds you want?
Who are the fund managers?
What are their track records?

How Do You Get Information and Manage Your Account?

Over the Net? Is information available all the time?
Is it easy to use the customer service section?

Who Stands Behind Payment of the Annuity?

How long have they been in business?
Are they a stable company you can expect to be around long into the future?