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Part of investing in your future is investing in yourself. While there are many ways to do this, one of the most important is being aware of how your financial situation can influence your future.

When we are younger, our financial focus is on the bigger commodities that will move us up to the next stages of life – graduating from university, replacing an old college junker with a newer car, moving into a more spacious home to accommodate a growing family, etc. However, as we age and life begins to settle, we start to wonder what our next stages are, specifically in regards to life beyond retirement.

While we may not consciously be thinking about retirement in our late twenties or early thirties, it’s important that we at least being preparing for it. You are familiar with IRA or 401(k) accounts, but annuities are also great tools to help individuals prepare for life after employment. But, like any major life decision, you should understand every option you have available to you before you decide to make a commitment.

Here is some information to help you understand how annuities work:

You won’t experience tax breaks up front.

When you first start putting your money into your annuity, they will not be tax-free contributions. This is worth mentioning because this is the opposite of how IRAs work the majority of the time, as well as 401(k)s. Because they are the most common retirement savings accounts, many believe this sort of benefit would apply to other tools as well.

Your asset will grow tax-deferred.

When you first open your annuity, you will not be able to able to claim your contribution on your taxes. However, your annuity will begin to generate a return and, once it does, that money will grow tax-deferred within your account.

You will not have to pay taxes until you begin making withdrawals.

For most retirement savings tools you decide to use, any withdrawals you make from your account will be taxed. The withdrawals that you make are taxed as ordinary income. Annuities, though, work a little bit differently. Once the value of your annuity drops under the premium amount you were paying, you will no longer have to pay taxes on the withdrawals you take out from your account.

Inherently, annuities are a great resource that more individuals should utilize as part of their future financial security. It is just important that you understand what you are agreeing to before you decide to commit to this as a money-saving tool.

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