Tax Deferral

How to Utilize

Tax Advantages of Annuities

Annuities grow tax-deferred. This means that there is no immediate tax on earnings. The interest in them is not taxed until you withdraw it. Your interest increasing without taxes is, of course, a huge benefit when saving money for retirement.

The tax advantages of annuities can also help maximize other sources of retirement income. For example, Social Security benefits. Social Security benefits may decrease if your annual income is over a certain amount. If you earn interest from CDs, bonds, or other investments, you must report it as income to the IRS. In some cases, this extra income causes your Social Security benefits to decrease. However, if you place your money in an annuity, the earnings won’t count against you. Once you take the money out, there’s taxation. But, holding off on taxes while your interest increases can be a beneficial strategy.

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Tax Advantages of Annuities With After-Tax Dollars

If you purchase a fixed indexed annuity with after-tax dollars, you’ll enjoy certain benefits. A fixed indexed annuity, or FIA, has two main stages. Accumulation and Distribution. It’s during the accumulation stage that your money increases, but because you haven’t actually taken the money out yet, it isn’t taxed. You don’t pay income tax on your premium payments. Less tax liability could mean you have more money for retirement.

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Tax Advantages of Annuities vs IRAs and 401(k)s

Traditional IRAs and 401(k)s also allow for tax deferrals. However, deferred annuity taxation is different, and has additional benefits. For example, an FIA has no government-defined contribution limit. You can contribute as much as you’d like. So, if you’ve already maxed out your 401(k) or other qualified plan, an FIA could be a good option.

Maybe you want no limits on your retirement savings. An FIA may work for you, too. In fact, in many cases, you can even “rollover” your IRA or 401(k) into an FIA. The tax implications of this may vary, so be sure to seek advice from a qualified source.

Early Retirement With an FIA

FIAs can provide additional tax savings options for some early retirees. Here are a few key criteria, however, that you must meet in order for these benefits to apply. 

You must be able to answer "yes" to all three of these conditions:
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You are under the age of 59 1/2
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You've received a lump-sum payment from your 401(k) profit-sharing plan
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The payment was a part of a severance or early retirement package

If all three of these apply, you may be in luck! Your money may be able to be rolled over into an annuity policy, without taxation. There are also ways to access this money penalty-free, before you retire. As you can see, there are numerous tax advantages to annuities. Contact us today to learn if an annuity is the right option for you!

If you have questions about tax deferrals, we can help.

We can educate you on them, and answer your questions, such as what are the stages and tax advantages of annuities?

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