Tax-Deferred Annuities

The money in an annuity product can grow without having to initially pay taxes on it. This is what’s known as tax deferral. Until you begin withdrawing the money, there’s no income to report, and therefore no tax forms to file. You only pay taxes on the money later, when the distribution phase of the annuity contract begins. Basically, this allows your money to compound and grow, tax-deferred. This is a major benefit to annuity contracts. But, what makes this so useful?

When your total income exceeds a certain amount, Social Security benefits may decrease. If you’ve contributed money into a CD, bonds, or other accounts, you have to report this as income. Sometimes, the extra income can cause your Social Security benefits to drop. However, if you put your money into an annuity, the earnings aren’t counted as income. In this case, your Social Security benefits are unaffected. You do pay income tax on the money when it’s taken out, however. But in the meantime, your money grows without the burden of taxes impacting it. This ultimately means more income for you in retirement once the distribution stage begins.

Understanding Tax-Deferred Annuities

Tax-Deferred Annuities Vs. 401(k)s and IRAs

An IRA, 401(k), or other retirement plan accounts may also provide tax-deferred growth. However, an FIA may provide additional benefits compared to these. For example, FIAs don’t have government-imposed contribution limits. Within certain other guidelines, you can contribute as much money as you need to. So, for retirees who have already maxed out their 401(k), an FIA could be an option to consider. Or, you may be able to rollover the money from your current retirement plan account into an FIA instead. Tax implications in this situation will vary, however. Be sure to consult a qualified tax advisor for more information on topics like this.

Early Retirement With a Tax-Deferred Annuity?

An FIA could also provide you with the possibility of retiring early. Under certain conditions, however. If you meet all the following criteria, you’re in luck:

  • You are under age 59 1/2
  • You have received a lump-sum payment from your employer-issued 401(k) plan
  • The payment you received was part of an early retirement or severance package
A couple riding their bikes on a path through the woods, discussing their tax-deferred annuity