Annuities
Tax Deferral
How Does a
Tax-Deferred Annuity Work?
Many retirees wonder how tax-deferred annuities work. Well, firstly, it’s important to know that when an annuity grows in earnings or from potential interest, there are no immediate taxes. But when you withdraw your funds, you’ll have to pay taxes on the income you receive. Any potential interest is added to your account with incurring taxes at the time of interest payment. Then, you pay regular income tax on the money you withdraw.
What are the Benefits of a Tax-Deferred Annuity?
A tax-deferred annuity is a long-term savings contract that can grow over a certain period of time, tax-deferred. The money being tax-deferred means you can contribute money before taxes, and will only pay tax when you withdraw money. There’s a chance for the funds to grow significantly in the time between when you first contribute your funds and when you withdraw them.
A tax-deferred annuity could also help retirees in getting the most from their other retirement accounts. As an example, your Social Security benefits may decline if your annual income goes up. Any interest from CDs, bonds, or other investments must be reported to the IRS. Therefore, you may find that your overall income has grown. This can cause your social security benefits to drop. If you place your money into an annuity, however, those earnings aren’t recorded as income right away. They won’t count against you. Of course, there will be taxation once you take the money out. But deferring taxes on your annuity while your money grows is certainly a great benefit.
After-Tax Dollars and Tax-Deferred Annuities
There are certain benefits you can receive when you purchase a fixed indexed annuity (FIA) using after-tax dollars. An FIA has two main stages. The first of these is the accumulation stage. During this growth stage, your FIA grows, tax-deferred. That means you won’t pay any taxes until you withdraw your money, and even then it’s an ordinary income tax. With this type of tax-deferred annuity, the growth compounds over time and could increase the overall wealth of your annuity. Some retirees find that less immediate tax liability means better long-term retirement income.
Tax-Deferred Annuities vs IRAs and 401(K)s
There are sometimes instances of clients we can’t help. Sometimes someone’s situation is simply outside our range of knowledge. But generally, most people we meet with have needs and priorities that match our values and offerings. It’s very important to us that, when deciding if you want to work with us, you feel confident in our abilities and trust us.
Your needs will sometimes shift over time. You may have been more open to investments that came with risk when you were younger, but now that you’re no longer working that’s probably changed. Most retirees can’t afford to experience a big dip in their retirement account. Especially as we age, our ability to recover from big losses lessens more and more. In some cases, people will have to work longer than they originally planned for this very reason. Worse yet, people who suffer market loss could find themselves needing to return to work after retirement in order to make ends meet. This obviously isn’t a situation we’d ever want our clients to be in.
Retiring Early with a Tax-Deferred Annuity
How are annuities taxed if you retire early? You could receive bonus tax benefits, depending on your situation. For these benefits to apply, you must meet certain criteria; the following things must apply to you:
- You must be under the age of 59 1/2
- You must have received a large lump-sum payment from your 401(k) profit-sharing plan
- This lump-sum payment must have been part of an early retirement package or severance package
If the above three things apply to you, you could have some options. Your money may be able to be rolled over into an annuity policy, without being taxed. There are a few methods you can obtain this money without being penalized. Usually, if you withdraw funds before you reach the age of 59 1/2, there would be a penalty. However, if you set up a substantially equal periodic payments (or SEPP) program, you may be able to get funds from the account. This is a potential tactic to access the money you thought you couldn’t touch until retirement. There are benefits to tax-deferred annuities.
A tax-deferred annuity also allows you to put off taxes on the money you’ve saved until you need it for retirement. Contact AGM Secure Money today to see if a tax-deferred annuity is a potential option for you.
