What Is A Tax-Deferred Annuity?

A tax-deferred annuity is an annuity product that gains interest without it being (initially) taxed.

A “tax-deferred annuity” refers to the fact that the money in the annuity can grow without having to initially pay taxes on it. Until your pull the money out, there’s no income to report and therefore no tax forms to file. You only pay taxes on this money later, when the annuity contract states you can take it out and you do so. Essentially, this allows your money to compound and grow, tax-deferred.

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You might also be able to use tax-deferred annuities to get the most out of other retirement accounts.

For example, when your total income exceeds a certain amount, social security benefits may decrease. If you’ve put money into a CD, bonds, or other investments you 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 you put your money into an annuity, the earnings aren’t counted as income. In this instance, social security benefits are not affected. You do pay income tax on the money when it’s taken out, of course. But if you wait, your money can grow without the tax burden. This could especially be important in terms of gaining income in retirement.

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IRAs, 401(k)s, and FIAs

An IRA or 401(k) may also provide tax-deferred growth. However, FIAs may provide an additional benefit: FIAs don’t have government-imposed contribution limits. Within certain other guidelines, you can put in as much money as you need. For retirees who have already put their limit into a 401(k), an FIA is an option to consider. It could be the case that you don’t want limits on how much retirement money you save. In this case, it’s possible to rollover an IRA or 401(k) into an FIA. Taxes in this situation will vary, so make sure you speak to a qualified tax advisor for more information.

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Choosing a Tax-Deferred Annuity For Early Retirement

An FIA could also work for you if you need to retire early. However, there are certain conditions that apply. In order to benefit from this strategy, you must meet all these criteria:

  • You are under the age of 59 1/2
  • Your previous employer gave you a payment from your 401(k) plan in one lump-sum
  • The lump-sum payment you received was due to an early retirement or severance package
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