An annuity comes in many forms, but a simple definition is that an annuity is a contract that converts a sum of money into a series of periodic payments for an agreed upon period of time. An annuity can be thought of as a financial vehicle that converts a pool of money into a stream of income. Annuities are most useful in addressing the financial planning needs of people in or approaching retirement. Annuities are unique in the financial world because they can provide protection against the risk or outliving one’s assets (longevity risk) by guaranteeing income payments in perpetuity or any other selected amount of time. Annuities can be viewed as a type of personal pension plan. Social Security is similar to an annuity in that money contributed over the course of one’s working years is converted into a series of periodic payments that provide income during retirement.
It's difficult to provide an in depth response without having some more detail on the type of annuity and your overall financial profile. That said, here are some points to consider and potentially present to your financial or tax advisor:
Good question.
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Great question.
We are not tax / financial advisors, but will try to provide some information that points you in the right direction and enables you to present good questions to your advisors.
The relevant section of the IRS code appears to be: Treas. Reg. section 1.401(a)(9)-6, Q&A12
Note that there appear to have been some relevant modifications to the IRS code in 2006.
