Three Benefits of Annuities
In 1653, a Neapolitan banker named Lorenzo Tonti developed a method for raising money in France called the tontine. Under this arrangement, subscribers purchased shares in exchange for income generated from the capital investment. As shareholders died off, their income was spread among the surviving partners until the last person alive collected all the benefits.
The use of tontines spread to Britain and the United States where governments used them to finance public works projects. However, the practice was eventually banned because it created an incentive for shareholders to bump off their partners in exchange for a greater payout.1
The tontine was an early predecessor to one of today’s most popular retirement accumulation vehicles: the annuity. Of course, one advantage is that no other investors have a stake in your annuity income, but all annuities share three basic benefits that can potentially help you reach your retirement goals.2
Tax Deferral
With an annuity, your contributions are invested during the accumulation phase. Any earnings grow tax deferred and are taxed as ordinary income when you begin making withdrawals.
Unlimited Contributions
Federal law typically limits the amount you can contribute to many tax-deferred retirement programs such as IRAs or 401(k) plans. But annuities are subject only to the sponsoring company’s contribution limits.
Flexible Withdrawals
An income stream for life is one option when you begin withdrawals from your annuity, but there are many alternatives. You can take a lump sum or make withdrawals when you need cash. You can even leave the money to continue growing tax deferred as a reserve for unexpected expenses or as a legacy for your heirs, subject to mandatory minimum distribution requirements.
Annuities have come a long way since 1653. Taking time to understand how annuities work can help you decide whether they are right for you.
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