Tax Deferral
Deferred annuities provide tax-deferred growth and flexible contributions, optimizing retirement income strategies compared to traditional accounts.
Deferred Annuity Taxation
Unlike an IRA or 401(k), an annuity contract has no contribution limit, and grows tax-deferred. There is no income to report and, therefore, no taxes to pay on it until you take money out. In this way, earnings are not subject to immediate taxation. Your money can gain interest at a reasonable rate** without the impact of taxes. Then, you pay income tax on the money when you begin taking payments.
Additionally, deferred annuity taxation can optimize other retirement income sources. For instance, if your yearly income exceeds a specific threshold, your Social Security benefits may be reduced. However, if you put your money in an annuity, interest gains will not count against you. This is an advantage it has over bonds, a CD, or other investments.
After-Tax Dollars and Deferred Annuity Taxation
There are certain tax advantages if you use after-tax dollars to purchase a fixed index annuity (FIA). An FIA contract works in two phases: accumulation and distribution. During the accumulation phase, your money has the benefit of deferred annuity taxation. You only have to pay taxes on the money when you withdraw it (this is the distribution phase). Less tax liability could mean you have more money for retirement.
Fixed Indexed Annuity vs. IRA or 401(k)
401(k)s and traditional IRAs also offer tax deferral. However, there are a few more advantages to deferred annuity taxation. For example, there are no government-imposed contribution limits for fixed index annuities. You are free to contribution as you need. For those who have already maxed out their 401(k) or other qualified accounts, an FIA may be a viable alternative. If you want fewer restrictions on your retirement income, it may be an advantageous idea to “rollover” the money in your 401(k) or IRA into an FIA instead. This may be possible under specific circumstances. Reach out to us, and we can help you determine the right course of action for you.
