…interest, dividends and capital gains accumulate tax-free in the account until you begin withdrawals. Because a 10% penalty tax normally applies on withdrawals before age 59-1/2, I recommend that you leave money in a deferred annuity until they reach at least that age.

When you start taking money out, the IRS assumes that the tax-deferred earnings come out first, to be taxed at "ordinary" (wage and salary) income rates. As an added bonus, the original principal you kicked in isn't taxed.

Two Ways to Profit

There are two basic ways to pull cash out of a deferred annuity.

Regardless of which route you choose you'll walk away with a pocket full of gains. At the end of the day, you just can't lose.

1) Most annuities allow you to make withdrawals pretty much whenever, and in whatever amounts, you want, after the surrender charge (imposed by the insurance company) has lapsed. Assuming you're past the age of 59-1/2, you won't incur any tax penalty, either.

2) At any age, you can "annuitize," converting a deferred policy into a stream of monthly payments for life or a period of years.

Bear in mind, though: Once you've elected to annuitize, you generally can't reverse the decision. If the owner should pass away before annuitization has begun, his or her beneficiary receives the proceeds of the count. Your money will never be tied up in limbo, unless so desired. (For example, you may choose to have payments spread out over a number of years.)

An Annuity Pick to Get You Started

I'd like to share with you one of my top two fix-annuities picks: Hartford Life's CRC Select, which behaves very much like a bank CD. But with no current tax on the interest, you can lock in your return for a stretch of five, six, seven, eight, nine or 10 years.

With Hartford, surrender charges for early redemption start at a stiff 6% the first year, but step down to 2% by the sixth year. In addition, if you bail out before the agreed term is up, Hartford will adjust your principal up or down, depending on whether interest rates have fallen or risen.

That's a very good deal, if I do say so myself.

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