DEFINITION of 'Wraparound Annuity'

A type of annuity that allows the investor (the holder of the annuity) control in the underlying investments in the annuity plan. An annuity is tax-deferred contract sold my an insurance copany that pays an income benefit on a regular basis for the life of the contract holder, the life of his or her spouse, or some other defined time period. The wraparound option give annuity holder the benefit of choosing the type of investment in the annuity.

BREAKING DOWN 'Wraparound Annuity'

Because the income generated in a wraparound annuity plan is tax-deferred (that is, no taxes are paid until a withdrawal is made), the IRS no longer allows individuals to choose underlying investments for the purpose of evading taxes. The exception is when the annuity holder could not otherwise purchase a type of fund; in other words, the IRS does not allow individuals to shelter funds in the tax-deferred annuity if the underlying investments can be purchased through other means (without a tax deferral).

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