What is tax-deferred growth? This guide will explain how annuities are given favorable tax treatment.
What is Tax Deferral?
Tax deferral means not paying federal income tax now, but in the future when you take withdrawals from your retirement savings account like a 401k, IRA, or annuity.
This also means that you will be earning interest on money that you would otherwise pay taxes on.
Retirement savings grow faster than gains that are taxed each year.
The longer the taxes are deferred, the better, especially if in a lower tax bracket during retirement.
Purchasing an annuity with after-tax dollars, only the annuity interest is subject to ordinary income taxes on your earnings when you begin withdrawing money (not on your premium payments).
Because of that, they can often be a good choice if you want to save more than IRAs and 401(k)s allow and still enjoy tax-deferred growth potential.
Purchasing an annuity within a retirement plan that already provides tax deferral results in no additional tax benefit.
Use an annuity to fund a qualified retirement plan based upon features other than tax deferrals, such as lifetime income options or the guaranteed death benefit.
The Benefits of Tax Deferral
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