An annuity is often referred to as a sort of contractual instrument that a person purchases with the expectation of receiving recurring payments in the future. The Social Security system, which people pay into during their working years in order to receive benefits after retirement, is a typical example of an annuity.
Annuity collections may have a fixed or variable nature. During the collecting period, a fixed annuity will produce consistent, predictable payments, but a variable annuity’s payouts will depend on the performance of the investment. The earning potential is bigger but the danger is higher with variable annuities. Although they might not always maximize the return on investment, fixed annuities are a safer alternative.
An annuity has a long timeline, thus the investment is divided into the “accumulation phase” and “annuitization phase,” respectively. The money in an annuity cannot be touched without incurring fees throughout the accumulation phase. The collection of the scheduled payments takes place during the annuitization phase.
A more broad definition of an annuity comprises any predetermined sequence of payments provided to an individual or entity.
The tax laws are very complex. Our short blog articles cannot cover in full all the nuances of the rules. Your specific facts may hold various opportunities and possible risks that only trained, experienced, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.
If you are a licensed tax professional and are interested in helping others either part or full-time, or ad hoc, come on in! Happy to have you. Our marketplace has the full suite of tools to communicate with clients including compliance calendars, task and message management, and billing. You can also quickly connect to knowledgeable colleagues who can complement your services with the ones you do not provide. Register here.