Consumers are aware annuities exist, but they don’t always understand the pure definition of an annuity. Simply stated, an annuity is a contract sold by an insurance company designed to provide payments to the holder at specified intervals, usually after retirement. That’s the simplest way to put it.

Inherent in all annuities are two phases, the accumulation and the annuitization phase. The accumulation phase is exactly as the name implies. It starts when you put money into the annuity. This is commonly called “funding” the annuity.

This phase provides the owner the benefit of tax deferral. The money earned in the form of interest is not declarable in the year received. It becomes taxable in the second phase.

Tax-deferred growth is frequently a benefit to the retiree. Once a person retires, he or she almost always finds themselves in a lower tax bracket. Given this is the case, a lower tax bracket means you will pay less in taxes on the money earned in your annuity when it is paid out to you during the payout period or, as stated above, the annuitization phase.

The annuitization phase, by definition, begins when you start taking money out of the annuity. Withdrawals, without penalty, can begin at age 59.5. In the United States, the Internal Revenue Service does not require you to begin taking distributions until age 70.5. You do not have to take your money in a lump sum. In fact, most people take monthly payments. This is a great benefit because you can let the remainder of your money continue to grow tax deferred.

Many annuities allow you the option of not taking a specific amount of money on a regular basis. Instead, you can withdraw the money as needed. This allows you the flexibility of taking the money on your schedule rather than one imposed by the IRS.

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