An income annuity

is a financial contract with an insurance company that individuals nearing retirement can purchase with a lump sum - usually with savings accumulated for retirement in an IRA or 401(k) - and begin to receive income within a short period of time, typically less than 13 months. Baby Boomers

In exchange, an insurance company guarantees regular income payments for as long as you live. The income received from an income annuity generally supplements other sources of guaranteed income, such as Social Security benefits and employer pensions. Here are some reasons an income annuity might be suitable for you.

An income annuity is a financial vehicle that can provide
guaranteed income for life.

Like other forms of insurance, income annuities use the principle of pooled risk as a way to transfer risk from the individual—you—to the insurance company. The insurance company manages longevity risk by grouping people into a single "pool of lives."

You choose how often to receive your income payments. Whether monthly, quarterly, semi-annually or annually, you can find a payout plan to fit your particular needs.

Some income annuities allow you to select a fixed income type (provides a predictable amount of income), or a variable income type (payments vary based on investment performance), or a combination of the two.
Some income annuities may allow you to make withdrawals (subject to certain restrictions).

You pay income taxes only as you receive your payments. When you receive income payments, you are taxed on the portion of the payments that is earnings and are only taxed on the portion that is principal if you purchased the annuity with qualified money (i.e., pre-tax dollars).

Income Annuity - US

In the US, income annuity contracts are only allowed to be sold by insurance companies, although private income annuity contracts may be arranged between donors to non-profits to reduce taxes.

Insurance companies are regulated by the states, so contracts or options that may be available in some states may not be available in others. However, their tax treatment is dictated by the Internal Revenue Code. There are two types of annuity contracts: the immediate annuity, which guarantees payments for a period of years or the lifetime of an individual or couple, and the deferred annuity, which grows tax deferred until such time as the annuity contract is annuitized (converted into an immediate annuity) or cashed in (either in periodic withdrawals or in a lump sum).