In the U.S., an annuity is a contract for a fixed sum of money usually paid by an insurance company to an investor in a stream of cash flows over a period of time, typically as a means of saving for retirement. Annuities can also be helpful for those seeking to diversify their retirement portfolios.

What is the purpose of an annuity?

An annuity is a long-term investment that is issued by an insurance company and is designed to help protect you from the risk of outliving your income. Through annuitization, your purchase payments (what you contribute) are converted into periodic payments that can last for life.

How do structured annuities work?

A structured annuity provides exposure to equity markets, giving you the growth potential you need to achieve your goals. For each indexed account you select, the performance of an underlying index will determine how much you can earn (either up to a cap or subject to a fee).

How is annuity income reported?

Distributions from your annuity are generally reportable on Form 1040, Form 1040-SR, or 1040-NR. You are required to attach Copy B of your 1099-R to your federal income tax return only if federal income tax is withheld and an amount is shown in Box 4.

Do structured annuities have fees?

Generally you will also have to pay an annual fee to manage and administer your annuity. This could be higher than the fees on your IRA or 401(k). Typically, it’s about 0.3 percent of the value of your annuity contract. This can also be a flat fee, perhaps $25 or $30 a year.

Can a policyholder have a structured annuity for income?

While policyholders can annuitize structured annuities, these products are not about income, and should not be considered an income solution for clients. However, structured annuities may be able to fulfill the accumulation need.

What’s the difference between indexed and structured annuities?

Unlike an indexed annuity, a structured annuity merely protects some of the downside and can cause a policyholder to lose money, similar to a variable annuity.

How are annual fees deducted from a structured annuity?

A spread or annual fee deducted to calculate the final return: Like an indexed annuity, some structured annuities offer options that have higher participation rates in exchange for an annual fee or spread. This additional cost is deducted from any gains.

What happens to the value of an annuity when you die?

It does not matter how your annuity’s investments perform. Alternatively, you can find variable annuities with enhanced death benefits. With an enhanced benefit, the insurance company will record the value of your annuity’s investments on each anniversary of your annuity’s start date.