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.
Similar to IRAs, annuities are a way for people to pay into an account and then repeat tax-deferred growth as well as investment income. The contribution phase is known as the deferral period in the case of annuities. Like the IRA, the annuity pays out as a low risk investment for many years. This annuity income must be taxed at regular income tax rates for the amount that is over principal. How are IRAs and annuities different? The latter does not have limits on the contribution amount or the withdrawal amount
The money market account is a great low risk investment carried on the backs of very short term instruments. Such money market accounts may be available at banks and related institutions like mutual fund firms. Money market accounts usually are insured by the government. One should be aware that a money market account is not the same as a money market fund. The former is the product of a single bank and is associated with an interest rate. The latter is a portfolio of money market securities and is not guaranteed at one interest rate, rather appreciating at changing returns over the course of the fund.
With respect to low risk investments, investors may be interested in GNMA mutual funds. During the stock market crisis caused at least partly by the property crisis of 2007, Freddie Mac and Fannie Mae fell victim to hemmorhaging drops in revenue forcing a statement from the Treasury to head off market panic. Ginnie Mae discovered that it was in a much better condition, showing little sign of being in need of help. The rules of the Federal government continue to demand that GNMA-titled funds to hold no less than 80% of assets in Ginnie Mae.
Large corporations and governments must carry debt in order to carry out day-to-day operations until enough tax is collected to repay the loan. Such a large scale financing cannot be done with a typical bank, but must involve the auctioning of bonds which are guarantees of payment. United States government bonds count themselves as one of the most widely traded safe investments all over the financial world because investors pick them up with almost unshakeable confidence that the bond will not go under.
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