An annuity is a contract you purchase from an insurance company. For the premium you pay, you receive certain fixed or variable interest crediting options able to compound tax- deferred until withdrawn. When you are ready to receive income distributions, this vehicle offers a variety of guaranteed payout options — some even for life.
Most annuities have provisions that allow you to withdraw a percentage of the value of the contract each year up to a certain limit. However, withdrawals will reduce the contract value and the value of any protected benefits. Excess withdrawals above the restricted limit typically incur “surrender charges” within the first 5-15 years of the contract. Because they are designed as a long-term retirement income vehicle, annuity withdrawals made before age 59½ are subject to a 10% penalty fee, and all withdrawals may be subject to income taxes.