Annuities and Tax Deferrals: What You Need to Know

For many people, tax deferral is by far the most important benefit of choosing an annuity as a retirement savings vehicle.

Because of that, it’s important that people understand at least the basics of tax deferral.

Following is a brief overview of tax deferrals:

Tax deferral is a means by which the payment of taxes on certain assets can be delayed until some date in the future.

Tax-deferred assets grow untaxed – with interest, dividends and capital gains appreciating – until they are withdrawn.

This permits you to experience potentially higher overall returns, since returns are not reduced by income taxes every year.

Since you probably won’t withdraw the assets until later in life, when you could be in a lower tax bracket, you may also minimize the taxes you have to pay on withdrawals.

That’s also the case with annuities.

Any contributions made on an after-tax basis will be tax-free at distribution time, although the contributions that were made on a pre-tax or tax-deferred basis will be fully taxable at distribution.

The legal and tax information contained in this article is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive.

Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither we nor our representatives may give legal or tax advice.