Pros

• Offers many tax benefits of a traditional nondeductible IRA but has no income, contribution, or withdrawal limits.
• Allows purchasers to spend down their portfolio of traditional assets during their expected life spans and then kicks in to help cover living expenses later in life.

Cons

• Although fixed deferred annuities sometimes entice with high teaser rates that are attractive compared with certificates of deposit or other short-term vehicles, those rates often reset to lower levels. Fixed deferred annuities typically offer a guaranteed minimum interest rate, but that can be quite low after the teaser period ends.
• Fixed deferred annuities, unlike CDs, don't offer FDIC protection, and you can't tap them for short-term income needs before you're age 59 1/2. You also may owe a surrender charge if you need access to your money early on in the life of your contract. (Annuities typically offer a "free look" provision, however, that lets you get all of your money back if you cancel the contract within a set number of days.)

Unlike a fixed immediate annuity, you don't begin taking payments from a fixed deferred annuity right away. Instead, the fixed deferred annuity functions something like a savings vehicle, where you can sock away money for retirement and earn a predetermined rate of interest. Fixed deferred annuities are sometimes called longevity insurance because you begin taking payouts later in life, after you've spent down your traditional portfolio of stocks, bonds, and mutual funds.

A fixed deferred annuity is somewhat (but not entirely) like putting a CD inside of an IRA. Like CDs, these vehicles guarantee you a fixed--albeit relatively low--interest rate. They also offer some of the same tax treatment as a traditional nondeductible IRA receives: Your contributions are nondeductible, but your investment increases on a tax-deferred basis. You will also owe a penalty if you take your assets out before you're 59 1/2, as is the case with a traditional IRA. The key differences versus an IRA are that the IRS doesn't impose any limits on how much you can stash in one, and you don't have to take assets out by age 70 1/2. Some fixed deferred annuities also include a death benefit, payable to your heirs, if you die before you begin taking income from your annuity.

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