Compound Interest and Tax Deferral Benefits of Fixed Annuities
An important benefit of a fixed annuity is the ability to grow your principal with a fixed rate of interest and then have that interest compound on a tax-deferred basis. Tax deferral means paying taxes later — when you withdraw the money or receive payments from the annuity. 3 Other nonqualified fixed investments don’t generally offer the ability to defer taxes, which can add up.
Lifetime Income Annuities are the ONLY financial product that can provide you with guaranteed lifetime income. This is certainly a benefit when you are looking to retire and supplement your other sources of income, such as Social Security. If you choose a lifetime income option, the insurance company provides you with a guaranteed income amount for the rest of your life and, potentially, your partner’s! If you bought your annuity with after-tax dollars, for example, using personal savings which you have already paid income tax on — part of each annuity payment will be excluded from income tax because it is considered a return of the amount you paid for the annuity and part will be taxable earnings. 4
3 Tax deferral is automatically provided by tax-qualified retirement plans, including IRAs. There is no additional tax-deferral benefit provided when an annuity contract is used to fund a tax-qualified retirement plan or an IRA. Investors should only consider buying this contract in conjunction with a tax-qualified retirement plan or an IRA for the annuity’s insurance features such as lifetime income payments. 4 This exclusion only applies to non-qualified annuities. If you bought your annuity with pre-tax dollars, for example, using 401(k) or IRA assets that have never been taxed, the annuity payments that you receive will be fully taxable.
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