Annuities:

Tax Deferral

Tax-Deferred Annuity

A fixed indexed annuity (FIA) allows you to increase your money without having to pay taxes on the interest. This is known as tax deferral. Until you withdraw the funds, there is no income to report and, therefore, no tax forms to file. You only pay taxes on the money when the annuity contract’s distribution stage begins, and you start withdrawing funds. Essentially, this enables your money to compound and grow tax-free.* This is one of the primary advantages of an FIA.

If you put money into a CD, bonds, or many other accounts, you must declare any earned interest income. Furthermore, if your overall income surpasses a particular threshold, your Social Security payments may decrease. However, if you contribute some of your money into a tax-deferred annuity, your earnings are not considered income. So, in this instance, Social Security is unaffected. You will pay income tax on the money when you withdraw it, but in the meantime, it will grow tax-free.* This may ultimately result in more money for you in retirement.

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grandparents greeting granddaughter and thinking about tax deferred annuity

Annuities Vs 401(k)s and IRAs

An IRA or 401(k) retirement plan account may also offer tax-deferred growth. However, an FIA may provide some additional benefits. For example, an FIA does not have government-imposed contribution limits. You may contribute as much money as you need, subject to some limitations. For retirees who have already maxed out their IRA or 401(k), an FIA may be worth considering. Alternatively, you may decide to transfer the funds from your 401(k) or IRA into an annuity instead. Tax ramifications in this situation will vary, therefore, seek a qualified tax expert.

Early Retirement With a Tax-Deferred Annuity?

An annuity may also be useful to you if you plan on retiring early. However, there are certain conditions that apply. If you meet all of the following criteria, you're in luck:

  • You are under the age of 59 1/2
  • You received a payment from your employer-issued 401(k) plan, in the form of one lump-sum
  • This lump-sum payment was part of an early retirement or severance package

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