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Chapter 16. Tax-Sheltered Annuities > The Different Characteristics of an Annui... - Pg. 157

Tax-Sheltered Annuities 157 The insurance company can also offer tax-deferred compounding of your money. That's complica- ted, but Congress says it's okay as long as they play by the same rules as qualified retirement plans. The number one rule is you can't get at this money without incurring a 10 percent penalty until you are 59½. You've heard that one before. And by now you know that everyone wants you to use your retirement money for just that--retirement. The insurance benefit doesn't amount to very much, but it does offer a comfort level to some retirees because they can't lose all of their money. The death benefit guarantees that your principal is safe; the principal is the money you put up as part of the deal. The Different Characteristics of an Annuity Let's start with the basics. Your first decision will be whether you want a deferred annuity or an immediate annuity. A deferred annuity means you have decided to put off collecting the income payments until sometime in the future. It usually allows you to add money to the contract until such time as you are ready to start collecting. An immediate annuity is one where you give the insurance company your money--always in a lump sum--and you start to collect an income immediately. Whether you select a deferred or immediate annuity depends on where you are in your retirement planning and how old you are now. Warning! Be aware that if you purchase a single-premium annuity, you may not be allowed to make future contributions. And if you have also chosen the deferred-income feature, you may not be able to change your mind at a later date. Also, if you choose an immediate annuity you will be faced with coming up with a large single premium. The next decision is easy; it's all about how you get your money to the insurance company. Is the annuity going to be a single premium, which means you give them a lump sum, or will you need to make periodic payments to the insurance company? The last decision is whether or not you choose a fixed or variable type of annuity. This refers to the investment and income piece of the annuity. A fixed (sounds like my neighbor's dog) annuity is one where you are guaranteed a fixed rate of return on your money. Often the first year rate is high-- we call them teaser rates . They get your attention because you think, "Wow, I can live on that!" You may also find that there is a base rate stated and then a bonus added to that for the first year. Most of the time, the fine print stating that this rate is just for one year goes unnoticed in the excitement of getting such a great rate. With a variable annuity your return can vary, and so can the income. So why is this the most popular type of annuity today? Because it can return more than the fixed type. When you purchase a variable annuity, you get more choices. For example, where do you want your annuity to be invested? Stocks, bonds, or cash equivalents? Often the choices include the mutual funds you have come to know and love. And with a stock market that for years has gone mostly in one direction--up--this has become a very popular product. It offers not only tax deferral but the real possibility of growth of your principal.