Annuities:
Tax-Deferral

Tax-Deferred Annuity

During the “accumulation phase,” the money in your tax-deferred annuity product can grow without being taxed (at least initially). This is referred to as tax deferral. Until you remove the money, there is no income to report and, hence, no tax forms to file. You will only pay taxes on the money once the annuity contract’s “distribution phase” begins, and you start actually taking payments. This feature enables your money to compound and grow tax-free, a significant benefit provided by annuities.

For example, when your overall income surpasses a certain threshold, your Social Security benefits may be reduced. And, if you deposit money in a CD, bonds, or other accounts, you must declare it as income. Sometimes the extra money can cause your Social Security benefits to decrease. However, if you purchase an annuity, the earnings are not considered income. In this instance, Social Security will remain unaffected. When you withdraw the money, you will be required to pay income tax. But, in the meantime, your money grows tax-free. This could lead to you receiving more incomeĀ in retirement once the distribution phase begins.

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Annuities Vs IRAs and 401(k)s

Your employer-issued 401(k) or IRA may also offer tax-deferred growth. However, a tax-deferred annuity offers certain additional benefits. For example, annuities do not have government-imposed contribution limits. For retirees who have already maxed out their 401(k), an annuity may be a viable choice. You may also be able to rollover funds from your 401(k) into an annuity instead. The tax ramifications of this situation will differ, therefore you should speak with a qualified tax professional for further details.

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Early Retirement With a Tax-Deferred Annuity

A fixed indexed annuity (FIA) could be of use to you if you want to retire earlier than the typical age. Certain conditions will apply, however, If you meet all the following criteria, you're in luck:
  • 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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