Annuity Basics

Immediate vs. Deferred Annuities (Part 2)

Do you want income now or income later?

When you purchase an annuity, you can choose between immediate annuities - if you want the income right away - or deferred annuities - if you want the opportunity to build your account value over time and convert it to income in the future.

Deferred Annuities:
A deferred annuity gives a person the opportunity to build their retirement savings over a number of years. What is being deferred is when the income is received. But in the period between signing the contract and converting the accumulated assets to a revenue stream, the deferred annuities investment has the opportunity to grow in either a fixed account, variable sub-accounts (investment portfolios--depending on investment performance), or both.

Unlike immediate annuities, which can only be purchased with a lump-sum, deferred annuities can be purchased with both a lump sum and or a series of payments. The ability to combine one-time and periodic contributions gives added flexibility in building a retirement annuities account.

In most cases, there is still limited access to the funds in a deferred annuities account until those accumulated assets are converted to a revenue stream. This means there can be some annual withdrawals, or surrender the contract entirely, getting back its then-current value minus any surrender fees. But if there are withdrawals, the money will be gone, and the retirement annuities account will be reduced. There may also be a 10% tax penalty prior to age 59½, see tax deferred annuities .

It Can Pay to Wait:
Deferred annuities are especially appealing if a person has "maxed out" their employer’s salary-reduction plan but wants to put away more for their retirement. And if a person isn’t earning income, deferred annuities are one way for potential earnings on the investments to grow tax deferred.

Unlike employer-sponsored plans and IRA’s, there are no annual limits to the amount that can be contributed to non-qualified deferred annuities; therefore more can be contributed when more is available, for example as the result of a big bonus or other windfall.

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