What is a deferred annuity?

A deferred annuity is a contract issued by an insurance company that allows you to accumulate money on a tax-deferred basis for long-term goals like retirement. Unlike a qualified retirement plan or an IRA, there are virtually no limits on contributions to a deferred annuity. However, there may be minimum purchase requirements.

There are two phases to a deferred annuity. The first is the "accumulation phase" during which your assets grow tax-deferred. If you withdraw money from your annuity during the "accumulation phase" of the contract, the insurance company may assess a charge to cover the cost of issuing the contract (commonly known as a withdrawal charge). You may also incur income tax and additional tax penalties as a result of withdrawals prior to age 59 1/2 (unless you qualify for certain limited exceptions).

The second is the "payout phase" which begins when you are ready to receive income from your annuity. At that time, there are a number of options from which you can choose, according to your needs. For example, you can withdraw your money in a lump sum, through systematic withdrawals or in a regular stream of income payments, guaranteed to last as long as you live. These payments will also be subject to taxation and, generally, for payments prior to age 59 1/2, a possible additional tax penalty.

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