Annuities can be a confusing topic because there are different types that can help you accomplish different goals. Because of that complexity, many people miss out on what could be a valuable solution. To help fill in some blanks, here are five things that you may not know about annuities. 1. Besides just guaranteeing income, some annuities both create income and grow savings.

The word 'annuity' is derived from the Latin annuus, meaning yearly. The original type of annuity guarantees the buyer annual payments for a set period. But income annuities aren’t the only kind. In contrast, accumulation-building annuities are designed to grow savings for the long term while deferring taxes. With them, you keep control of your money, earn interest and can pass the funds to your heirs. These come in different types.

Fixed annuities, which include fixed-rate annuities and fixed-indexed annuities, guarantee your principal. Variable annuities are linked to the performance of financial markets and have fewer guarantees, exposing your principal to investment risk. Of course, the income annuity is still a valuable tool. The most popular type guarantees lifetime income, starting either almost immediately (immediate annuity) or at a future date (deferred income annuity). Essentially, you’re converting some of your money into your own private pension.

Many independent financial experts say that most people should put a substantial part of their savings into an income annuity when they approach or enter retirement. 2. You won’t pay a sales charge. The selling agent earns a commission, but you won’t pay it. The issuing insurance company does. All of the money you deposit in an annuity goes to work for you right away. Many people don’t believe this, but it’s true. If you encounter an agent who would charge you an upfront commission, go elsewhere.

Once you own an annuity you might pay a fee under a couple of limited circumstances. If you surrender your annuity early or take excessive withdrawals during the surrender period, the insurer will hit you with a surrender penalty. Most annuities do permit partial withdrawals annually up to a certain limit, so there is usually some liquidity. However, any earnings withdrawn from a nonqualified annuity before age 59 1/2 are normally subject to income tax plus a 10% IRS penalty.

Optional riders, which provide additional benefits like increased liquidity or guaranteed lifetime income, typically have a fee deducted from your annuity account value annually. 3. The interest rate can be guaranteed for up to 10 years. A traditional fixed-rate annuity pays a set interest rate that’s usually guaranteed for just the first year. After that, you’re guaranteed only a minimum rate as specified in the contract. Potentially, the insurance company could take advantage of you in subsequent years.

But now you can guarantee the interest rate from three to 10 years with a multi-year guaranteed annuity (MYGA). It behaves much like a bank CD. For instance, you could choose one that guarantees 5.66% for five years. Unlike a CD, a nonqualified annuity is tax-deferred as long as the interest earnings are not withdrawn. Current rates are historically high, so it’s a good time to consider a MYGA.

4. There are no government-imposed limits on how much you can put in a nonqualified annuity. Qualified retirement plans like traditional IRAs, Roth IRAs, and 401(k) plans have annual limits on contributions. The law places no limits on the amount of nonqualified funds you can allocate to annuities. If you can afford to place a big lump sum in an income or accumulation-building annuity, you’re free to do so. Earnings compound free of federal and state taxes until they’re withdrawn. If withdrawals can be postponed indefinitely, they’re tax-deferred.

The exception is an immediate-income annuity, where you’ll get some ongoing taxable income along with a tax-free return of principal. 5. Annuities can work well in an IRA or Roth IRA. Since annuities provide tax deferral, it may seem redundant to use them in a tax-deferred retirement plan. However, an annuity can work well within a qualified plan, particularly an IRA or a Roth IRA. They’re especially apt for people in their 50s and older.

A MYGA can be an excellent substitute for bonds. The guaranteed rate of three to 10 years can be matched to your time horizon and usually exceeds rates on available bank CDs or individual bonds. Bond funds, in contrast, don’t offer a guaranteed rate of return. A fixed-indexed annuity offers market-based growth potential while still guaranteeing your principal. They pay a share of the gain as an annual interest rate credit when the stock market goes up. These complex products are meant for the long term, which is why they can work well as IRAs.

You must start taking required minimum distributions (RMDs) from your IRA, 401(k) plan or other qualified retirement plans when you reach age 73. You can defer some RMDs by placing some of your IRA assets in a qualified longevity annuity contract (QLAC). A QLAC lets you keep more of your retirement plan intact and tax-deferred longer. With annuities, what you don’t know can hurt you. They’re one of the mainstay financial products that everyone should know something about.

Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and lifetime income annuities. A free rate comparison service with interest rates from dozens of insurers is available at www.annuityadvantage.com or by calling (800) 239-0356.