When one thinks of investments, one usually envisions stocks, mutual funds and other intangible securities. In contrast to these financial products, annuities are low risk investments that offer consistent, tax-deferred income. In the U.S. only insurance companies sell annuities. There are a number available differing in the payment options, underlying investment vehicle, and schedule of return. This article discusses how IRAs and annuities have similar features.
The classic IRA is a government mandated retirement product that allows a person to make contributions during the working period, and withdrawals during the retired period. The IRA accrues value without incurring taxes, but usually must be taxed in the case of withdrawing from the traditional IRA. A Roth IRA does not get taxed during withdrawal phase, but neither is it deducted from income during contributions.
Like IRAs, annuities require a pay-in period which can be very short. Also like IRAs the pay-out period can be made to stretch out over several years. While the earnings grow protected from tax, at the time of the distribution it must be taxed as regular income. The taxes apply only the fraction of the distribution that represents growth of the principal, as tax was presumably already paid on the principal.
Savings or checking accounts do not frequently offer the best possible interest rates which pushes investors to turn elsewhere. Undoubtedly investors will learn about the money market account that resemble regular bank accounts but provide more lucrative rates. Money market accounts usually are insured by the FDIC. It is important to understand the difference between a regular money market account and a money market fund dealing with money market assets. The fund is often sold by mutual fund companies and is a collection of multiple money market securities.
One kind of low risk investment fund that is not well-known is the Ginnie Mae fund, especially when compared to the related Fannie Mae and Freddie Mac. The three are involved in setting up to property buyers and profit handsomely from the mortgage stream. Ginnie Mae found was in a good position, exhibiting few signs of being in need of a Federal government-mediated bail-out. The rules of the Federal government still demand that GNMA-titled funds to hold more than 80% of assets in GNMA-related securities.
Another kind of low risk investment is a corporate bond. Giant corporations required to borrow money so as to execute day-to-day operations until enough earnings is generated to pay back the borrowed money. Acquiring money at these amounts is accomplished with the help of the sale of bonds, which are basically promises to repay plus interest. U.S. Treasury bonds count themselves as one of the most popular safe investments in the globe due to low default risk.