UNDERSTANDING YOUR ANNUITY AND LIQUIDITY OPTIONS

What is an Annuity Contract? 

An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of 
payments to fund the annuity.  In return, the insurer agrees to make periodic payments to you beginning immediately or at some 
future date.  Depending on the policy of the insurance company, when you reach a specific age you may have to begin making 
withdrawals. Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your 
beneficiary a guaranteed minimum amount. This document will help you better understand annuity contracts, including their 
various types, features and associated costs.  In this document the description of the taxable features of annuities and of the
federal tax penalty relate to non-qualified annuities.  A withdrawal or surrender from a qualified annuity is taxed differently, as 
the entire distribution amount will be subject to ordinary income taxes.  This document also describes the compensation that your 
Baird Financial Advisor and Baird receive as a result of your investment in an annuity.   
Annuities are one of the most popular investment products available today, but can be difficult to understand.  One reason 
annuities are attractive is that they can help build more value over time.  By providing potential growth that is tax deferred, an 
annuity’s investment earnings can accumulate and compound untouched by federal, state, or local income taxes until you begin 
making withdrawals.  However, before you buy an annuity, it is important to understand the risks, charges and expenses 
associated with the investment in addition to reviewing your financial situation, goals, risk tolerance, time horizon, diversification 
needs and liquidity requirements.  Baird wants to make sure that you have considered other investment options such as mutual 
funds, life insurance and other types of securities before purchasing an annuity. 
Many features of annuities make them attractive to those who seek investments that supplement retirement benefits and to 
retirees who want greater control over their income and the flexibility to continue to defer taxes on investment earnings.  
Annuities are designed to be long-term investments that help meet retirement and other long-term goals.  Annuities are not 
suitable for meeting short-term goals because substantial taxes and insurance company charges may apply if you withdraw your 
money early.   Investing in pre-tax investment options such as IRAs and employer sponsored 401(k) plans, also may provide you 
with tax-deferred growth and other tax advantages.  For most investors, it will be advantageous to make the maximum allowable 
contributions to IRAs and 401(k) plans before investing in an annuity.  Also, annuities may be qualified or non-qualified.  A 
qualified annuity is funded with pre-tax dollars.  An annuity that is funded with pre-tax dollars means that the contribution may 
lower your current taxable income, but the entire distribution amount taken from a qualified annuity will be subject to ordinary 
income taxes.  A non-qualified annuity is funded with after-tax dollars.  A distribution from a non-qualified annuity will be taxed 
only on the portion that comes from earnings of the annuity, not on the entire distribution.       
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