Tax Deferred Annuities
Deferred annuities are contracts issued by insurance companies for people who want to save on a tax-deferred basis, usually for an extended period of time, and then optionally convert their accumulation value into a guaranteed monthly payout once they retire. Unlike an immediate annuity, where income payments must begin within one year of purchase, deferred annuities do not start their income payout phase until triggered by the annuity owner, at whatever time is most advantageous for the owners retirement income needs. This triggering event is called annuitization.
Under current federal tax law, deferred annuities receive special tax treatment. Income tax on earnings left to grow and compound in non-qualified annuities is deferred, which means you aren’t taxed on the interest your money earns while it stays in the annuity. Tax-deferred accumulation is not the same as tax-free accumulation. The interest earnings held inside a tax deferred annuity must eventually be taxed, but only when the owner decides to make a withdrawal or activate income payments, giving them complete control as to the timing so they can minimize taxation.
One of the many advantages of tax deferral is that the tax bracket you’re in when you make withdrawals, or receive annuity income payments, may be lower than the one you’re in during the accumulation period. You’ll also be earning interest on the amount you would normally have paid in taxes during the accumulation period, which has a positive compounding effect on your annuities accumulation value. Please visit our Deferred Annuities page for additional information and details regarding tax deferred annuities and their benefits.
Deferred annuities are available in many different product categories – traditional fixed, multi-year guarantee and fixed indexed just to name a few. The tax-deferral feature of these annuities works the same, regardless of the product design. The primary difference between these multiple types of tax-deferred annuities is in how interest is calculated and credited, as well as their diverse contract features.
Another benefit of deferred annuities is that you can deposit as much money as you want, without the limitations normally found with other types of tax favored retirement savings vehicles such as an Individual Retirement Account (IRA) or 401k. There is no IRS restriction on the amount that can be contributed annually to a non-qualified deferred annuity.
If you have further questions or would like assistance in navigating all of your annuity options, please give us a call. One of our Annuity Specialists would be happy to patiently answer all of your questions and help guide you to the most appropriate deferred annuity for your individual needs.