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What is a Tax-Deferred Annuity? A tax-deferred annuity is a contract between you and an insurance company for a guaranteed interest-bearing policy with guaranteed income options. The insurance company credits interest, and you don’t pay taxes on the earnings until you make a withdrawal or begin receiving an annuity income. Your annuity contract earns a competitive return that is very safe. Tax-Deferred? Tax-deferred annuity means postponing your taxes on interest earnings until withdrawal at a future point in time. In the meantime you are able to earn interest on the money you may otherwise have paid in taxes. You can accumulate more money over a shorter period of time, which potentially will provide you with a greater income. Savings Advantages Many people today are choosing tax-deferred annuities as the foundation of their overall financial plan. Why? The traditional savings dollar may be taxed every year. By postponing that tax with a tax-deferred annuity, your money compounds faster because you can earn interest on dollars that likely would have otherwise been paid to the IRS. Later, if you decide to take a monthly income, your taxes may be less because they will be spread out over a period of years. Similar to many CDs, annuities have a penalty for early surrender. Safety Your tax-deferred annuity is safe; qualified legal reserve life insurance companies are required to meet their contractual obligations to you. Tax Advantages You pay NO taxes on funds in your annuity while your money is compounding. You may also pay a lower tax on random withdrawals because you control the tax year in which the withdrawals are made, and only pay taxes on the interest withdrawn. Tax deferral gives you potential control over an important expense – your taxes. The Tax-Deferred Advantage It's not what you earn — but what you keep! Take a look at the effects of taxation on your investment earnings...
That's a difference of $119,609! Learn how to capture the magic of tax deferral. No More 1099s! There is no withholding tax on funds in your annuity while your account is compounding; it is completely tax-deferred. If you request a distribution (random withdrawal or annuity income), taxes will be withheld. Under certain circumstances, an election not to withhold can be made at the time you make your request. Because the interest is tax-deferred, it is not necessary to issue a Form 1099 while your money is compounding. Only when your interest is distributed (withdrawal or annuity income) will Form 1099 be sent, reflecting the amount of interest actually received. When Does My Money Mature? An annuity policy does not “mature” like a bond or certificate of deposit. Both your principal and interest will automatically continue to earn interest until withdrawn or until you reach age 100 (in most states). You can let your money continue to grow, make withdrawals, or subject to applicable withdrawal or tax penalties, begin receiving an annuity income at any time.What Is The Penalty Tax And When Does It Apply?An IRS penalty tax, currently 10%, may be payable on any withdrawal of interest or qualified premium made prior to age 59 1/2. Avoid Probate If a premature death should occur, the accumulating funds within your annuity may be transferred to your named beneficiaries, avoiding the probate process. Like most assets, however, the annuity is part of your taxable estate. Your heirs can choose to receive a lump sum payment, or a guaranteed monthly income. |
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