A major benefit of choosing an annuity as a
retirement savings vehicle is tax deferral, which is simply the means by which
the payment of taxes on certain assets can be delayed until some future date.
Here’s why tax deferral can be beneficial.
Tax-deferred assets, such as investments in
annuities, grow untaxed, meaning that interest earned on the investments in the
annuity appreciates until they are withdrawn.
That’s called compounding. Compounding is the process
by which the money you make from an investment can be reinvested to make even
more money. As a hypothetical example, let’s say you have invested $10,000 and it earns interest of 10% per year.
In the first year, you will earn $1,000 in interest. But in the second year,
you will earn $1,100 in interest. Why? Because not only does your initial
investment of $10,000 accrue interest, but so does the additional $1,000 you
earned in the first year.
Because your investment isn’t reduced by income
taxes every year, you experience potentially higher overall returns in your
annuity’s accumulation phase.
It’s also important to note that through tax deferral
you may receive a lower tax rate upon withdrawal. Since you probably will not
withdraw the assets you’re accumulating in your annuity
until later in life (when you may be in a lower
tax bracket), you also may minimize the taxes you have to pay when you withdraw
your investment.
Your advisor can help you determine if an
annuity is a good tax-deferred investment vehicle for you.
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.
