Annuity

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What is an annuity? 

An annuity is a contract made between a person (called a “purchaser” or “annuitant”) and an insurance company (called an “insurer”). This contract is long-term in nature where the purchaser makes either a single lump-sum contribution or a series of contributions to the insurance company over a specific period. In exchange, the insurer guarantees to give back periodic payments to the purchaser which can start immediately or at a future date. 

How does it work? 

Now that we know the basic definition of an annuity, let us dig deeper into detail. Individuals may purchase an annuity contract on their own. If you are an employee, it is good to check if you may purchase an annuity contract through your employer. 

Think about annuity as filling up a water tank for storage. The period when you are filling up the tank or funding your annuity is called the “accumulation phase”. Once the tank is filled, it is time to get water out of it, one bucket at a time. This is called the “annuitization phase” of the contract where you, as the purchaser, will receive a steady payout for the rest of your life. 

What is the purpose of an annuity?

Although individuals can set aside money for retirement, what will happen if it runs out? What will happen if you outlive your lifetime savings? That risk is exactly what an annuity contract addresses. Having an annuity contract will allow a person guaranteed payouts after retirement. It is a reliable way of having a steady cash stream without the fear of outliving your savings.

Aside from retirement purposes, a purchaser can also opt to shift a large amount of money or lump sum into a steady cash flow. Did you win the lottery? You can choose to contribute it to an annuity plan to have it paid out to you in increments. 

The payout or annuitization phase is entirely up to you as the purchaser. May it be immediate or at a specific age, it will depend on your needs. 

What are the common types of annuities? 

As we discussed earlier, annuities can be differentiated based on when the payout begins.

 

Annuities can also be structured differently.

 

What is a Qualified Employee Annuity? 

This is a type of annuity under an employer’s qualified employee annuity program. A qualified employee annuity is purchased by an employer for an employee as a retirement savings plan that meets Internal Revenue Code requirements. It is funded with pre-tax dollars which means that there are no taxes owed on the money that accumulates or accrues in the account provided that there is no withdrawal made. 

What does the IRS require for an Employee Annuity?

According to the IRS, employee annuities can be qualified or non-qualified. 

In qualified employee annuities:

For more detailed information, it is best to see the IRS website. 

Is Annuity the same as a 401(k)?

No, they are not the same. While both annuities and 401(k) offer good retirement savings plan options, they are significantly different. 

What are the major differences between Annuity and 401(k)?

Here are some key differences between an annuity and 401(k):

Planning for retirement and preparing for the future entails a lot of research and planning. For employers, there can be many challenges in providing employee annuities. As a result, organizations may yet be prepared to offer annuity plans to their employees. 

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