Should I buy a deferred annuity for short-term goals?

Question

Accepted Answer

No. You should not buy an annuity to reach short-term financial goals. Annuities are most often bought for future retirement income. An annuity is a contract with an insurance company. With an annuity, the insurance company promises to pay you income on a regular basis for a period of time you choose, including the rest of your life. An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. An annuity is neither a life insurance nor a health insurance policy. It is not a savings account or a savings certificate. A deferred annuity has two parts or periods. During the accumulation period, the money you put into the annuity, less any applicable charges, earns interest. The earnings grow tax-deferred as long as you leave them in the annuity. During the second period, called the payout period, the company pays income to you or to someone you choose. Deferred annuities usually have a surrender or withdrawal charge if you take money out too early. If you take out part of the value, you may pay a withdrawal charge. If you take out all of the value and surrender the annuity, you may pay a surrender charge. The company may reduce or even eliminate the surrender charge after you have had the contract for a stated number of years. Income tax on annuities is deferred, which means you are not taxed on the interest your money earns while it stays in the annuity. You may also have to pay a 10% tax penalty if you withdraw the accumulation before age 59 1/2. You will pay ordinary income tax when you take a withdrawal or receive payments.