Annuity

An annuity is a contract with an insurance company that provides guaranteed current or future payments in exchange for a premium or series of premiums. The interest earned on an annuity is not taxed until the funds are paid out or withdrawn. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made before the age of 59½, penalties may apply. The guarantees associated with an annuity depend on the claims-paying ability of the issuing company. Additionally, annuities come with fees, and a surrender charge may apply if the contract owner terminates the annuity before certain conditions are met.