What is a tax deferred Annuity?
The money in an annuity gains value without having to pay taxes on it. You only pay taxes on an annuity once the distribution phase begins and you take money out. This is an advantage that an annuity has over other financial retirement options, among others.
Using a Tax-Deferred Annuity to Get the Most Out of Retirement
If you’ve put money into a CD, bonds, or other investments, you may have to report this as income. Sometimes, the extra income you earn from your interest in retirement and retirement account can cause your Social Security benefits to drop.
But, if you purchase an annuity, those earnings aren’t counted as income. So, Social Security benefits are unaffected. This could be an effective way to take control of your retirement. Did we mention that annuities don’t have required minimum distributions, or a contribution limit?
Annuities Vs IRAs and 401(k)s
An IRA or 401(k) retirement plan account may also provide tax-deferred growth. However, an annuity provides additional benefits: No government-imposed contribution limits. If you’ve already reached the limit of the amount you can put into your retirement accounts, and want to put away even more money, an annuity may be an option to consider. Also, annuities apply to different tax rules as an insurance product. Again, please contact a qualified tax advisor about this topic.
Retire Early with a Tax-Deferred Annuity?
A tax-deferred annuity could also work for you if you’re looking to retire early. However, there are certain conditions that apply. You may be able to use a tax-deferred annuity for early retirement if:
- You are under age 59 1/2
- You received a lump-sum payment from your previous employer’s 401(k) plan
- This lump-sum payment was part of an early retirement or severance package