Annuity – Financial Terms

Originally, an annuity was simply an annual payment-hence the name. Over time, annuity has come to refer to different kinds of payments, investments, and financial products.

Most commonly, an annuity describes the amount you receive from your pension each year, usually in monthly installments. But, in fact, annuity also refers to the annual income you receive from any source, as well as the source itself. For example, some tax-deferred retirement savings plans are called annuities.

When an annuity is offered as part of a qualified plan, such as a 401(k), a 403(b), or tax-sheltered annuity (TSA), you defer tax on your contribution as well as on any earnings, and you typically begin to receive income from the annuity when you retire.

You can also buy other types of annuities, which provide tax-deferred earnings, a source of regular income, or both. For example, you can buy a nonqualified deferred annuity while you’re working and get income from it when you retire. Or you can buy an immediate annuity when you retire and receive monthly payments as long as you live.

With nonqualified annuities, there are no federal limits on annual contributions and no required withdrawals. You also have a wide choice of products, which can be structured to fit your particular goals and risk tolerance.