What is Triple Interest Crediting?
Triple Interest Crediting is a financial concept that only Annuities offer through Tax Deferral. It is a simple concept to understand but let me give you an example.
When you purchase a Bank CD for 1 year, your principal is protected but the interest might not be as high as a Fixed Annuity. However at the end of the year, you will get back your original principal with interest. That interest earned is income and taxable as such. Regardless of the amount of interest earned, you are taxed.
When you invest in the Stock market through a broker, or a popular online stock purchase system, you buy and sell stocks. Hopefully you have earned a point or two on your initial investment and have not lost. At years end, you will get a statement of profits and losses and you will be taxed on profits as income. There are no choices even if you leave your money in the market, you are still taxed on profits.
When you purchase an annuity with an insurance company through a insurance broker you will be told that the interest earned is tax deferred. There are many misconceptions about taxes and annuities. There are many considerations when opening an annuity with either Qualified funds or Non-Qualified funds. You see many warnings about IRS taxes and it is important to know the difference between these types of accounts. Earnings from qualified accounts are built up over time with pre tax dollars. When distributions are taken it is taxed as ordinary income. Earnings from non qualified accounts are built up over time with after tax dollars and when distributions are taken they are taxed on a LIFO basis. That means that your initial principal will be paid out tax free, when that is gone, then rest of the gains are taxed as ordinary income. Annuities have the ability to compound interest on interest and defer taxes thus earning more interest.
We like to call it Triple Interest Crediting and here is how it works.
- Your account value earns interest on principal
- Your interest earns interest on that same principal and interest
- You earn interest on the money you would have otherwise paid in taxes
If the interest earned in an annuity wasn’t tax-deferred, you’d have to pay taxes on it. But since it’s tax-deferred, that money stays in the annuity, deferring taxes while you accumulate more and more interest. That is what we call Triple Interest Crediting. Like they always say, the only two things in life that are certain is death and taxes. However we suspect that your tax rate will be substantially lower in your retirement years than your earning years.
There are many advantages to annuities and this is just one of them. There are ways however to never pay taxes and we would suggest a Roth Annuity is you really do not want to pay taxes in your retirement years. You still will however on your social security income when taken. But that is another page so as long as you understand the concept we can move on.