Can an Annuity Help My Retirement Money Grow Tax Deferred?

 What Is an Annuity?

An annuity is a contract between you and an insurance company. In exchange for a current premium, your insurer agrees to pay you a future stream of income. Although annuities are not necessarily liquid financial products, they do possess some very flexible features. For instance, you can pay your premium all at once or you can pay it over time — it’s up to you. In addition, you can specify when you would like to begin receiving the income from your annuity. You can start immediately or you can let your annuity accumulate.

One of the most attractive features of annuities is that they are allowed to grow tax deferred. Because you do not have to pay taxes on the growth of your annuity until withdrawn, annuities have become an attractive accumulation alternative.

Immediate Annuities 

With an immediate annuity, payments usually begin a month after you have paid a lump sum premium. This makes them a popular source of supplementary income for retirees.

Immediate annuities provide some tax deferral. Only the interest portion of each payment is considered taxable income. The rest of each payment is considered a return of your principal. Taxes on the earnings of the annuity are spread over the payout period, which means you pay fewer taxes in the early years.

Non-Qualified Deferred Annuities 

With a non-qualified deferred annuity, you allow your premiums to accumulate before you begin the payout period. Deferred annuities give you the option of paying fixed or flexible premiums, and you can pay them all at once or over time. The earnings of the annuity are not taxed until they are withdrawn. This may allow you to accumulate more over the long term than taxable investments would. And you decide when to start receiving income from your annuity.

Annuities are insurance-based financial products designed to provide income in retirement. There may be a 10 percent penalty on amounts withdrawn prior to age 59 1/2 in addition to regular income taxes. Surrender charges may also apply in the early years of the policy.

Please consider the charges, risks, expenses, and investment objectives carefully before purchasing a variable annuity.  For a prospectus containing this and other information, please contact a financial professional.  Read it carefully before you invest or send money.

There are contract limitations and fees and charges associated with annuities, which include, but are not limited to, mortality and expense risk charges, sales and surrender charges, administrative fees, and charges for optional benefits.  A financial professional can provide cost information and complete details.

An annuity contract that is purchased to fund a qualified retirement plan should be done so for the annuity's features and benefits other than tax deferral.  For such cases, tax deferral is not an additional benefit for the annuity.  You may also want to consider the relative features, benefits, and costs of this annuity with any other investment that you may have in connection with your retirement plan or arrangement.

This material was written and prepared by Emerald Publications.

© 2007 Emerald Publications

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