What is a Tax Deferred Annuity? How can Tax Deferral help me?
A tax-deferred annuity is a contract between you and an insurance company for a guaranteed interest bearing contract. The Company credits interest, and you don’t pay taxes on the earnings until you make a withdrawal or begin receiving an annuity income. There are difference with tax deferred qualified annuities and tax deferred non qualified annuities so understand the differences. Qualified annuity proceeds are taxed as ordinary income, while non qualified annuity proceeds are taxed on a LIFO basis.
What is Tax Deferral?
Tax deferral means that you are postponing paying taxes on interest earned until a future date. During that “deferral” time you are earning interest on dollars that would otherwise be paid as taxes. We call this concept Triple Interest Crediting. Allowing you the potential to accumulate more money over a shorter period of time, which ultimately can provide you with a greater account value and a greater return. Your money grows faster because you earn interest on dollars that would otherwise be paid in taxes. Your premium earns interest, the interest compounds within the contract and the money you would have paid in taxes earns interest.
Who would consider these Tax Deferred Annuities?
- Income earners that are in a high tax bracket
- Have exhausted or maxed out other forms of retirement savings
- Those that experience a large windfall and need to spread out the tax burden
- Anyone that wants to defer taxes to a future time or lower tax bracket
Phases of Deferred Annuities
The Savings phase of deferred annuities is when you the annuitant contribute savings to the tax deferred annuity account. This is most optimal if done over a long period of time. With tax deferred annuities there are no contribution limits unless you need to deposit over one million dollars. If you are fortunate to have those funds, we suggest breaking them up into different accounts. This savings phase also allows you to contribute monies to the account and possibly receive tax credits for contributions in accordance with IRS guidelines.
The Income phase is when you decide to start receiving payments from your tax deferred annuity. You have several options for payouts but ultimately it is your choice. You have to consider the tax implications of your withdrawals for either qualified accounts or non qualified accounts.