If you\’re looking at an annuity as a way to invest your funds, you may find that your head will swim as you find there are more types than you expected. The primary types of annuities are fixed annuities, variable annuities and indexed annuities. Within each of these types of annuities you\’ll find immediate annuities and deferred annuities. Once you go even deeper, there\’s a volume of different products from a variety of different companies.

All annuities have certain features in common. One of those features is the tax-deferred growth. As with any benefit given by the government, there\’s also a downside. If you remove any funds from the annuity before the age of 59 , you have to pay taxes and a 10 percent penalty on the growth. Since the distributions from an annuity follow the LIFO rules, last in, first out, interest is always the first thing the IRS considers you to remove.

The easiest way to narrow down the selection is to decide exactly what you want in your product. Fixed annuities are probably the easiest to understand. These products are often compared to CDs. The fixed annuity pays a fixed rate of return, there\’s no risk to the principle because of market fluctuations and like a CD, and after a specific period you can remove the cash value penalty free.

Annuities provide the advantage of withdrawal before the surrender date which is not present in a CD. Both the CDs and the annuities provide the advantage of taking out the interest part every year, the fixed annuities provide you the access to utilize the principal amount and some of them permit the use of 10 percent of the contract value. If you keep it unused, it will be added in the following year.

Variable annuities have mutual funds as their funding vehicle, although many also have a fixed fund on the interior. Unlike the fixed annuity, the principle fluctuates. Some variable annuity contracts offer riders that guarantee either a specific percentage of return each year or at the minimum, a return of premium regardless of market conditions. These riders of course, cost the owner of the contract a small amount every year but are well worth the cost in fluctuating or dropping market conditions.

Unlike the mutual funds outside of variable annuity contracts, the owner can switch to different families of funds within the contract without paying a load each time they switch. Because of the tax deferred status of the variable annuity, switching from fund to fund does not trigger a taxable incident.

The third type of annuity, an indexed annuity, is a hybrid between the fixed annuity and the variable. Like the fixed annuity there is a guaranteed interest rate. However, the interest rate is slightly lower than most fixed annuities. It\’s lower because there\’s also a potential for a much higher growth. The annuity is tied to a specific index. It might be the S&P 500 or an international stock index. If the index increases, depending on the contract and the amount of participation, the contract owner receives a portion of that growth.

Every contract differs in fixed and variable annuity. There is the scope of access to the funds in all kinds of annuities but they differ from one company to the other. You are allowed to obtain an immediate annuity or the deferred annuity in these three kinds of contracts. It all depends upon your desire whether you need the income instantly or keep it to grow for a later period.

It is better to consult an annuity expert before finalizing an investment. You will find several efficient sites in the internet to know the details of workings of annuities and obtain annuity quotes to take a suitable decision.

John C. Ryan discusses annuities and other retirement products. To learn more about how an annuity might be a good part of an investment portfolio, or to get a quote, see our website.

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