An annuity is a contract between you and an insurance company.
In its simplest form, you pay money to an annuity issuer, and the issuer pays you back the principal and earnings at some point in the future.
Annuities are either qualified or nonqualified. Qualified annuities are used in connection with tax-advantaged retirement plans, such as 401(k) plans. Nonqualified annuity are not tax deductible, and taxes are paid only on the earnings when distributed.
There are four parties to an annuity contract: the annuity issuer, the owner, the annuitant, and the beneficiary.
There are two distinct phases to an annuity: (1) the accumulation (or investment) phase and (2) the distribution phase.
It is important to understand that annuities can be an excellent tool if you use them properly.
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