An annuity is a contract between you and an insurance company. The most popular type of annuity is an immediate annuity, which offers a steady stream of income for life. This is very attractive for people planning retirement or building residual income.

Things You Will Need

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Step 1

Understand the costs. Most people are unaware of the costs and penalties associated with owning an annuity. There are costs involved in opening a variable annuity. These costs depend on the services and benefits provided to the annuity holder. Most fees are determined by both an annual and asset basis.

Step 2

Beware of tax penalties involved in early withdraw. If you don't like the performance of your annuity, the only way to avoid penalties is to roll your annuity into another annuity. If you withdraw your annuity before the age of 59 1/2, you will be subject to additional tax penalties. You can still withdraw the interest gained each month, but you can't withdraw the principle without tax penalties.

Step 3

Choose the right account manager. Before you buy an annuity, you have to choose an account manager. You should base your decision on independent research, company cash flow and consistent performance. Always study the history of a company before making a decision. The performance of your annuity depends a lot on your account manager.

Step 4

Learn about Tax-defferred annuities. The tax-deferred annuities come in two types: fixed rate or variable. In this type of annuity, you can invest your money, and the earnings on that cash build up to a certain amount of growth. The fixed rate annuity is basically a CD inside the insurance company contract.

Step 5

Consider an immediate annuity. An immediate annuity is more attractive for conservative investors looking to retire, because it offers a steady stream of monthly income for as long as you live. This income is used to build passive income each month.

Step 6

Withdraw monthly, instead of letting it build up. When you withdraw your annuity growth each month, you are essentially saving yourself a lot of money on capital gains tax. At the end of the year, you will have to show how much money you made on your investment. For this reason, it is beneficial that you withdraw your annuity growth every month.


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