Tax Deferral

How do tax-deferred annuities work?

How Does a Tax-Deferred Annuity Work?

A tax-deferred annuity is an insurance contract that generates income for retirement. The accumulated retirement earnings may be converted into a lifetime income stream.

Tax-Deferred Annuity Benefits

A tax deferral is a way of delaying the payment of income taxes.

Contributing pre-tax funds to an annuity premium reduces taxable income.

Annuity payments can also include dividends, capital gains, and interest. Contributions and earnings won’t be taxable until you withdraw money or receive income. Thus, your income will continue to grow without being reduced by taxes.  As a result, retirement earnings can be converted into lifetime income.

A tax-deferred annuity can enhance retirement strategies for retirees.  For instance, social security benefits are reduced if you earn more than a certain amount. Furthermore, you must report interest earned on CDs, bonds, and other investments to the IRS. This could reduce your social security benefits. On the other hand, earnings from an annuity do not count against you since they won’t produce income right away. The ability to defer taxes on your annuity while your money grows can be very beneficial.

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Taxes and Withdrawals During Retirement

An FIA consists of two parts: accumulation and distribution. An FIA is eligible for a tax advantage during the accumulation phase. Interest growth is tax-deferred, so tax will not be due until the money is withdrawn. Most fixed index annuities tax ordinary income, but not capital gains. By reducing your liabilities, you might be able to earn more in retirement. Let us help you explore your options for taxing your retirement income.

Comparing Deferred Annuities To IRAs And 401(K)S

Fixed index annuities are more flexible and have fewer restrictions than IRAs and 401(k)s. 

  • FIA contributions are unlimited.
  • There are circumstances in which you can roll over 401(k)s and IRAs into FIAs. 
  • Your earnings compound tax-free* each year.
  • You can keep all the money you earn when you contribute tax-free*.

Deferred Taxes And Early Retirement

How does annuity tax affect early retirees? Some tax advantages may apply to you if you qualify. These benefits are determined by several factors.

  1. Must be at least 59 1/2 years old
  2. Lump-sum payments under a 401(k) plan
  3. A lump-sum payment must have been part of your retirement or severance package

You may qualify if you meet all three requirements. In some cases, you may not be liable for taxes if you roll over the money into an annuity policy.

Get in touch with our team at MTD Financial if you are considering a tax-deferred annuity.

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