What is an annuity?

An annuity pays a monthly (or quarterly, semi-annual, or annual) income benefit for the life of a person or for a specified period of time. The annuitant (insured) can never outlive the income from the annuity. While the basic purpose of life insurance is to provide an income for a beneficiary at the death of the insured, the annuity is intended to provide an income for the life of the annuitant.

There are two basic types of annuities, fixed annuities, which pay a fixed income backed by fixed dollar investment such as secure bonds and mortgages, and variable annuities, which vary in payment according to the value of stock and bond investments.

This is the first year that I received retirement benefits. Are any of my benefits taxable?

If you receive retirement benefits in the form of pension or annuity payments, the amounts you receive may be fully taxable, or partly taxable in the year received. Refer to Tax Topic 410 , Pensions and Annuities , for detailed information, or Publication 575, Pension and Annuity Income . For social security and equivalent railroad retirement benefits, refer to Tax Topic 423 or Publication 915, Social Security and Equivalent Railroad Retirement Benefits .

References:

• Publication 575 , Pension and Annuity Income
• Publication 915 , Social Security and Equivalent Railroad Retirement Benefits
• Tax Topic 410 , Pensions and Annuities
• Tax Topic 423 , Social security and equivalent railroad retirement benefits

What is a cash balance plan?

There are two general types of pension plans-Defined Benefit Plans and Defined Contribution Plans. In general, defined benefit plans provide a specific benefit at retirement for each eligible employee, while defined contribution plans specify the amount of contributions to be made by the employer toward an employee's retirement account. In a defined contribution plan, the actual amount of retirement benefits provided to an employee depends on the amount of the contributions as well as the gains or losses of the account.

How do cash balance plans differ from 401(k) plans?

Cash balance plans are defined benefit plans. In contrast, 401(k) plans are a type of defined contribution plan.

Is my annuity subject to the annual cost-of-living adjustment?

No. The annuity portion of your retirement allowance is not subject to the annual cost-of-living adjustment.

Is my entire monthly annuity payment taxable?

No. Some portion of your monthly annuity payment will be reported as nontaxable to the IRS. This monthly excludable amount is based on the total amount you contributed to your annuity as well as your and your beneficiary's life expectancies.