An annuity is an investment contract or policy between you and a life insurance company. Annuities can be a useful tool for retirement planning:

• Save tax-free
  Annuities enable you to save money on a tax-deferred basis. You will not pay taxes until you begin to withdraw your money. Unlike a 401(k) or IRA, there are no limits on the amount you can put into an annuity.
  
  
• Offers retirement income
  You can purchase a contract that provides lifelong income or one that pays you for a specific time. Payments can be monthly, quarterly, semiannually or annually at a designated time.
  
  
• Provides benefits to your heirs
  Some annuities include an insurance component. If you die before you start to collect on the annuity, it pays your heirs the amount you invested plus interest or the market value of the funds in your account, whichever is more.
  
  
• Offers an array of investment options
  You determine how much you want to invest in an annuity and the amount of investment risk you are willing to take. If you put your money into a variable annuity, your premiums can be invested in stock or bond funds. There are no tax consequences if market conditions prompt you to change how your balances are invested. You can also change from one fund to another without tax consequences. If you don't want to deal with the ups and downs of the stock market, you can invest your money in a fixed annuity, which would offer you a specific rate of return.