Tax Deferral

What is a Tax-Deferred Annuity?

Start thinking ahead. What kind of retirement strategy are you imagining for yourself? What steps are you taking to fulfill it? Are you putting enough money into savings? Are you taking advantage of all the available retirement saving options? One option you can use for planning your retirement is a tax-deferred annuity.

The Benefits of a Tax-Deferred Annuity

A tax-deferred annuity is a long-term savings contract. It can grow, tax-deferred. The money that is contributed to an annuity is tax-deferred. This means that you can contribute money before taxes. There are no tax forms to file, and no income that you need to report. You only pay taxes when you withdraw your money. During the time in between when you contribute funds and when you withdraw them, it’s possible for your money to grow significantly. You pay taxes later, when you make a withdrawal.

A tax-deferred annuity can also be used to assist retirees in getting the most out of their other retirement accounts. For example, if your income is over a certain amount, you may see a decrease in your social security benefits. So if you earn interest from bonds, CDs, or other investments, the income must be reported to the IRS. In some cases, this can cause social security benefits to drop. But, if you place your money in as an annuity, those earnings don’t count against you. Once you take the money out, there is of course taxation. But deferring taxes while your money grows can yield great benefits.

After-Tax Dollars and Tax-Deferred Annuities

If you purchase a fixed indexed annuity (or FIA) using after-tax dollars, you can enjoy some tax benefits. During the first stage of an FIA, the accumulation stage, your FIA has a tax advantage. It grows tax-deferred. This means you don’t pay tax on your payments. You don’t pay any taxes at all until you take your money out. Additionally, when you do take your money out, you’ll only pay ordinary income tax on your earnings. Less liability could mean more money in your retirement.

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Tax-Deferred Annuity Vs. 401(K)s and IRAs

Let’s talk tax deferrals. A tax-deferred annuity can help you get ahead on your retirement savings. Similar to both 401(K)s and IRAs, annuities allow for tax deferrals. Yet unlike these more traditional retirement savings plans, a tax-deferred annuity doesn’t have contribution limits set by the government. This means that you can put as much money in as you’d like within certain guidelines. This makes them a great choice for retirees who want to save more than what a 401(K) or IRA will allow.

Maybe you don’t want any limits on how much money you can save for retirement. IF that’s the case, FIAs may work in your favor as well. It’s possible in many cases to “rollover” your 401(K) or IRA into an FIA. Tax implications may vary, so it’s recommended that you seek advice from someone qualified. At Turney Financial Group, LLC, we’re here to help, no matter what your financial needs are.

Retiring Early with a Tax-Deferred Annuity

FIAs can provide additional tax savings for some early retirees. You need to meet a few criteria, however, for these benefits to apply:

  1. You must be under the age of 59 1/2
  2. You must have received a large lump-sum payment from your 401(K) profit-sharing plan
  3. This lump-sum payment must have been part of an early retirement package or severance package

If the above criteria apply to you, you could be in luck. Your money may be able to rollover into an annuity policy without being taxed. There are a few ways you can access this money without being penalized. Normally, if you withdraw funds before you reach the age of 59 1/2, there will be a penalty. If you set a substantially equal periodic payments program, however, you may be able to get money from the account. This is a possible strategy to access your money that you thought would be inaccessible until retirement. Deferred annuity taxation can certainly have its benefits for many retirees.

A tax-deferred annuity allows you to put off taxes on the money you put into it, until you need it for retirement. Contact us today to see if a tax-deferred annuity is an option available to you.

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