Question 1

What is an annuity and how does it work?

Accepted Answer

An annuity is a financial product that provides guaranteed income payments, typically used for retirement. You make a lump-sum payment or series of payments to an insurance company, and they return regular income payments over a set period or for life. Annuities can be immediate (start within 1 year) or deferred (start later).

Question 2

What is the difference between immediate and deferred annuities?

Accepted Answer

Immediate annuities begin payouts within 1 year of purchase, ideal for those already retired needing income now. Deferred annuities delay payouts for years, allowing the principal to grow tax-deferred before receiving income. Deferred annuities are better for younger individuals planning ahead for retirement.

Question 3

Are annuity payments taxable?

Accepted Answer

Annuity taxation depends on funding source and payment type. Non-qualified annuities (after-tax money) have earnings taxed as ordinary income when withdrawn. Qualified annuities (pre-tax money like IRA) have entire payout taxed as income. Roth annuities are tax-free. Earnings grow tax-deferred in all annuity types.

Question 4

What are the pros and cons of annuities?

Accepted Answer

Pros: Guaranteed income, tax-deferred growth, no contribution limits, lifetime payout options. Cons: High fees, limited flexibility, inflation risk (fixed payments), surrender charges, lower returns than alternatives. Annuities work best as part of diversified retirement strategy, not as sole income source.

Question 5

How much income does a $100,000 annuity pay?

Accepted Answer

A $100,000 immediate annuity for a 65-year-old might pay approximately $500-600 monthly for life, depending on rates and gender. For a 20-year fixed period, expect roughly $600-700 monthly. Rates vary by age, annuity type, interest rates, and company. Always compare quotes from multiple insurers.

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