With a deferred annuity, you invest a lump-sum or a series of payments. The goal is that over time you will build up a large account that you can tap to supplement your retirement income.
Among deferred annuities, variable annuities offer a menu of investment accounts, including stock funds, bond funds, balanced portfolios, etc. The chief reason to choose a variable annuity is to shoot for higher-than-bond-type returns.
As long as you keep your money inside the contract, no tax is due on the investment earnings. You can even switch among accounts without paying tax on gains you lock in.
Withdrawals generally are taxable, though, and there’s a 10 percent tax penalty if you take money out before age 59 1/2. (Insurers may impose surrender charges, too, for withdrawals in the first few years.) Therefore, a deferred annuity should be a long-term investment, one you don’t expect to tap before age 59 1/2, at the very earliest.