What is Annuity?

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.  Annuities are often bought for future retirement income.  Only an annuity can pay an income that can be guaranteed to last as long as you live.

An annuity is neither a life insurance nor a health insurance policy.  It’s not a savings account or a savings certificate.  You shouldn’t buy an annuity to reach short-term financial goals.  Your value in an annuity contract is the premiums you’ve paid, less any applicable charges, plus interest credited.  The insurance company uses the value to figure the amount of most of the benefits that you can choose to receive from an annuity contract. 

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. 

Individual Retirement Annuity (IRA)

The Economic Growth and Tax Relief Reconciliation Act of 2001 was passed by Congress and signed by President Bush.  The new law provides higher limits for contributions to IRAs and employee sponsored retirement plans.  These changes provide significant opportunities for you to increase your savings, generally tax deferred, for retirement.  The change went effect on January 1, 2002.

The new law increased the maximum contribution limit for both Traditional and Roth IRA as follows:

New IRA Contribution Limits
Tax Year                   Annual Contribution Limit
2002-2004                 $3,000.00
2005-2007                 $4,000.00
2008                         $5,000.00
Beyond 2008             Indexed for inflation annually in $500.00 increments

Catch-up Contributions
Individuals who reach age 50 by the end of calendar year are permitted to make additional pre-tax contributions per following:
Tax Year                     Catch-up Contribution Limit
2002                            $500.00
2003                            $500.00
2004                            $500.00
2005                            $500.00
2006 and thereafter       $1,000.00

When it comes to retirement plans, not only should you look for financial strength of a company, but also shop for the ones which offer the highest interest rates and/or charge minimum maintenance fees.