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An annuity is a contract between you and an insurance company. You make an irrevocable deposit, and the insurance company promises to pay you a fixed amount each year for as long as you live, or for a set period of time. They are complicated financial products so while they can be useful in some situations they are not necessarily right for everybody.
Traditional annuities make sense for savers seeking a consistent way to accumulate tax-deferred income. Annuities are a contract between you and an insurer that guarantees payments. Payments are based upon your age, the amount you invest and how long you live.
Annuities are long term investments that pay you monthly or annual payments. You contribute money over a period of time, and at the end of that time your money is kept in an account that pays out regularly. Annuities are not for everyone—most people cannot invest their entire savings, including retirement accounts, into annuities. However there are several situations where annuities make sense.
There is a surrender charge (CDSC) imposed generally during the first 5-7 years that you own your annuity contract. Withdrawals prior to age 59 ½ may result in a 10% IRA tax penalty, in addition to any ordinary income tax. The guarantee of the annuity is backed by the claims paying ability of the issuing insurance company.