Tax-Deferred Annuity

Tax-Deferred Annuity

The money in an annuity product can grow during the “accumulation phase” without having to (initially) pay taxes on it. This is known as tax deferral. Until you withdraw the money, there is no income to report, and therefore, no tax forms for you to file. You will only pay taxes on the money later on, when the “distribution phase” of the annuity contract begins. This allows your money to compound and grow, tax-deferred. This is a major benefit offered by annuities.

For example, when your total income exceeds a certain amount, your Social Security benefits may decrease. If you’ve put money in a CD, in bonds, or other accounts, you have to report this as income. Sometimes, the extra income can cause your Social Security benefits to drop. But, if you put your money into an annuity instead, the earnings aren’t counted as income. In this case, Social Security will be unaffected. You will pay income tax on the money when it’s taken out. But, in the meantime, your money grows without the tax burden. This just means more income for you in retirement once the distribution phase begins.

Annuities vs IRAs and 401(k)s

Your employer-issued 401(k) or IRA may also provide tax-deferred growth. However, a tax-deferred annuity provides some additional benefits. For example, annuities don’t come with government-imposed contribution limits. Within certain other guidelines, you can contribute as much money as you need to your annuity. For retirees who have already maxed out their 401(k), an annuity is a good option to consider.

Or, you may be able to rollover the money from your 401(k) into an annuity instead. The tax implications of this situation will vary, so you should consult a qualified tax advisor for more information.

Early Retirement With a Tax-Deferred Annuity

A fixed indexed annuity (FIA) could be of use to you if you plan on retiring early. Certain conditions will apply. You're in luck, however, if you meet all the following criteria:
  • You are under age 59 1/2
  • You have received a payment from your employer-issued 401(k) plan in the form of one lump-sum
  • This lump-sum payment was received as part of an early retirement or severance package
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