Understand the Basics

What Are Annuities?

At Sonoma Financial, our goal is to provide you with the tools you need to make the right decisions for your retirement. Annuities are one of the types of products we offer to potentially help you. So, what are annuities? An annuity, in simple terms, is a contract with a life insurance company. An annuity can help to grow and protect your retirement assets, provide guaranteed* income, and reduce your risk of outliving your retirement money. Because it is an insurance product, taxes work differently on an annuity. Any growth in your annuity is tax-deferred. You won’t have to pay taxes on that money until you access it.


There are different types of annuities available. Each type has different attributes to it. Some types of annuities may be able to help you achieve your financial goals for retirement.


What Are Fixed Indexed Annuities?

A fixed indexed annuity, or FIA, is a tax-deferred, long-term income-earning option.

An FIA provides protection of principal, even in the event of a stock market drop. This is what separates it from other types of annuities, such as variable annuities. FIAs come with reasonable rates of return** over time, which separates them from other, more traditional retirement accounts. Additionally, they come with less risk than other annuity types.


An FIA is a product, not an investment. Returns are based on the performance of an underlying index. For example, the S&P 500. The index follows the market, however, your money isn’t directly linked to it. You can get potentially high returns when the market is trending up, but not lose anything when it’s on a downward trend.

Stages Of Annuities​

There are two stages to an annuity contract, called accumulation and distribution. The accumulation phase involves letting your money grow. The distribution phase begins when retirees access and use their funds.



This is the first stage of your annuity contract. This is the time during which you save and build the value of your retirement funds. FIAs grow at a set interest rate, regardless of market conditions. Additionally, the money grows tax-deferred. The accumulation phase allows your money to increase steadily, while you leave it where it is.



This is the second stage to your annuity contract. This is when you start receiving payments from the annuity, to create an income during retirement. Annuitization is converting an annuity into a regular payment. You can schedule when you receive payments: Monthly, quarterly, or annually. There’s even the option to receive a lifetime income.

happy couple kayaking what are annuities

Annuities and Taxes

As your money accumulates, it grows tax-free. You only pay income tax on the money when you withdraw it. If you want to lower your current tax liability, an annuity is an incredibly useful tool. Want to learn more about annuities? What are annuities, and what are the different types? Contact us to learn the answer to that, and more.

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