We are often asked…

What Is A Tax-Deferred Annuity?

A tax-deferred annuity refers to the fact that money in an annuity can grow without paying taxes right away.

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A tax-deferred annuity refers to the fact that money in an annuity can grow without paying taxes right away. In fact, unless you pull money out, there is no income to report and no tax forms to file. So, your earnings do not get a tax immediately. Instead, you pay taxes later when you pull money out. When the time comes, your annuity contract states that you can withdraw money. Then, you only pay taxes on the amount you take. Essentially, this allows your money to compound and grow tax-deferred. At the time you take your money out, that is when you pay your taxes.

You may also be able to use tax-deferred annuities to assist in getting the most of other retirement accounts. For example, when your total income exceeds a certain amount, social security benefits may decrease. Retirees who have CDs, bonds, or other investments earning interest may have to report this as income. Sometimes, the extra income you earn from your interest and retirement account can cause your social security benefits to drop. Alternatively, if a retiree puts money into an annuity, the earnings are not counted as income. In this case, social security benefits are not affected. There is taxation when the money is taken out, of course. However, if you wait, your money can grow without the tax burden. This could be especially important in terms of overall income in retirement

The option of using

Using After-Tax Dollars

Retirees may also choose to purchase a fixed index annuity (FIA) with after-tax dollars. With this in mind, let’s discuss possible benefits. An FIA has a growth stage and a pay-out stage. Firstly, your FIA grows in stage 1 with a tax advantage. Namely, it grows without taxes. The money you place into your FIA can gain earnings without taxation. In fact, until you withdraw the money, there are no taxes to pay. At that point, you would pay regular income taxes on your withdrawals. If you pay less in taxes, it could mean you have more money for retirement.

what is a tax deferred annuity
what is a tax deferred annuity
How do these work?

IRA, 401(k), and FIAs

Your IRA and 401(k) may also provide tax-deferred growth. However, FIA’s and their tax-deferral may provide something additionally beneficial. For instance, fixed index annuities do not have government-imposed limits. You can put in as much money in as you’d like, within certain other guidelines. So, for retirees who have already put their limit into a 401(k), for example, a fixed index annuity might be a consideration.

Also, it could be that you don’t want limits on how much retirement money you save. In this case, FIA’s may work for you as well. You may also put an IRA or 401(k) into an FIA with a rollover process. Taxes in this situation will vary so make sure you speak to someone qualified for more information. At Choules Financial, we seek to find out which options are the best for you.

What is a

Tax-Deferred Annuity for Early Retirement

A fixed index annuity might also be a fit for you if you lost your job due to early retirement. However, there are certain conditions that apply. In order to benefit from this strategy, you must meet all criteria below.

  1. You are under 59 1/2 years of age
  2. Your previous employer gave you payment from your 401(k) profit-sharing plan in a big lump sum
  3. The lump-sum payment you got was due to an early retirement or severance package

If you meet all conditions above, you may have a beneficial FIA option. Using a “rollover”, you may be able to put your money into an annuity policy, without taxes. In addition, you may be able to access this money without penalty. Usually, an additional fine exists for people who try to access retirement funds too early. However, with a “Substantially Equal Periodic Payments” (SEPP) strategy, your cash may be available to you sooner. Potentially, retirees can gain access to money they thought was only available after retirement. Clearly, tax-deferred annuities have their benefits.

what is a tax deferred annuity
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