There are two main types of annuities: fixed and variable. With a fixed annuity, you pay a premium to an insurance company in exchange for guaranteed income payments, either for a certain period of time or for your entire life. With a variable annuity, your money is invested in mutual fund-like buckets that provide a variable rate of return that might ultimately be more or less than with a fixed annuity.
Annuities serve a useful purpose for certain select investors. But for the most part, you can use other investments to accomplish everything an annuity can without dealing with the more toxic aspects, such as high fees and high surrender charges that can cost 7% or more if you withdraw money in the first few years after purchase. Annuities also have the same restrictions as IRA accounts in that you can’t withdraw money before age 59 1/2 without facing tax penalties.
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