Tax Deferral
Tax-Deferred Annuity
The money in a fixed indexed annuity (FIA) can grow without having to initially pay taxes on interest. This is called tax deferral.
Until you withdraw the money, there’s no income to report and, therefore, no tax forms to file. You only pay taxes on the money when the distribution stage of the annuity contract begins, and you begin withdrawing funds. Essentially, this allows your money to compound and grow, tax-deferred. This is one of the major benefits of an FIA.
If you’ve put money into a CD, bonds, or other accounts, you would have to report this as income. And when your total income exceeds a certain amount, your Social Security benefits could drop. But, if you put your money into a tax-deferred annuity instead, your earnings aren’t counted as income. In this case, Social Security is unaffected. You will pay income tax on the money when it’s taken out, but, in the meantime, your money grows with no tax burden. This ultimately means more income for you in retirement.
Annuities Vs 401(k)s and IRAs
An IRA or 401(k) retirement plan account may also provide tax-deferred growth. However, an FIA comes with additional benefits. For example, an FIA doesn’t have government-imposed contribution limits. Within certain other guidelines, you may contribute as much money as you need. For retirees who have already maxed out their IRA or 401(k), an FIA could be an option to consider. Or, you may decide to rollover the money from your 401(k) or IRA into an annuity instead.
Tax implications in this situation will vary, so be sure to consult a qualified tax advisor – We have a qualified tax professional on-hand!
Early Retirement With a Tax-Deferred Annuity?
An FIA may also be beneficial 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 age of 59½
- 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
