Deferred Annuity
What is it?
A deferred annuity, much like other annuities, is an insurance contract that generates a pension-like income for retirement. Typically a deferred annuity is purchased with either a lump-sum or recurring payments that pays back your money plus some interest. Payments usually start after a minimum of two years after the contract start date.
Taxation and Withdrawals
Deferred annuities are very similar in scope to 401(k)s or IRAs. With these two investment vehicles, you do not owe income taxes on your gains while your money is in the account, however, you must pay income tax when you start taking income from the account. Deferred annuities are much the same, as long as your money is in the annuity contract, you do not owe any income taxes, but you must pay income taxes on any withdrawals from the annuity.
Deferred annuities are best suited as a long-term investment due to a few reasons. The IRS could impose an early withdrawal penalty of 10% if you make a withdrawal before age 59.5 on top of any income taxes. Additionally, most deferred annuities have a surrender charge if you try to make a non-scheduled lump-sum withdrawal or cancel the contract too early. Typically, most deferred annuities have a surrender charge the first 5 to 10 years of the contract.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Benefits of A Deferred Annuity
Deferred annuities can be an ideal asset for a well-rounded financial portfolio
- Generates guaranteed income for life or a set amount of time
- You are interested in adding stability and diversity to your portfolio
- You want to chose when your income begins, 2 years or 20 years later
- Tax advantaged savings on your gains as long as your money stays in the annuity
- No contribution maximums unlike other retirement savings vehicles
- Additional Riders that can add a death benefits or minimum payment amount
Drawbacks of A Deferred Annuity
Deferred annuities have some considerations you should take into account
- Deferred annuities can be complicated especially with how your deposits are assigned (fixed vs. indexed)
- Annuities in general have poor liquidity, once you sign up the decision can be permanent
- You can be assessed an early withdrawal penalty if you take out money before age 59.5
- Annuities can have fees. Some contracts have 0 fees and some have high fees
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