Questions About A
Tax-Deferred Annuity?

Many retirees wonder “How are annuities taxed?”. First off, it is crucial to know that when an annuity grows in earnings or from potential interest, there are no immediate taxes. But, when you withdraw your funds, you will have to pay taxes on the income you receive. Any potential interest is added to your retirement income without incurring taxes at the time of interest payment. Then you pay your tax on any money you withdraw.

What Are The Benefits Of A Tax-Deferred Annuity?

A tax-deferred annuity is a long-term earnings contract that over a certain period of time can grow tax-deferred. The money that you contribute to the annuity is tax-deferred, which means you can contribute money before taxes. You will only pay taxes when you withdraw your money. In the time between when you first contribute your funds and when you withdraw them, there is a chance for the funds to grow significantly.

A tax-deferred annuity can also be useful in assisting retirees to receive the most from their other retirement vehicles. For example, your social security benefits may decline if your annual income goes up. Any interest from bonds, CDs, or other financial vehicles must be reported to the IRS. Therefore you may find that your overall income has grown. This can cause your social security benefits to drop. But if you place your money in as an annuity those earnings are not income right away, do not count against you. Of course, once you take out the money there is taxation. But, deferring taxes on your annuity while your money grows can generate great benefits.

After-Tax Dollars and Tax-Deferred Annuities

There are certain benefits you can receive when you purchase a fixed index annuity (FIA) using after-tax dollars. A fixed index annuity or an FIA has two main stages to it. The first is referred to as the “accumulation stage”. During this accumulation stage, your fixed index annuity (FIA) grows tax-deferred. That means you won’t pay any taxes on your payments. You won’t pay any taxes until you withdraw your money. Also, when you do withdraw your money, you will only need to pay ordinary income taxes on your earnings. As time goes on this tax-deferred annuity, accumulation compounds and could increase the overall wealth of your annuity. Some retirees find that less immediate tax liability means better long-term retirement income.

Tax-Deferred Annuities VS. IRAs and 401(k)s

401(k)s or traditional IRAs also allow tax deferrals. However, delaying taxes through a fixed index annuity (FIA) can have extra benefits that 401(k)s or traditional IRAs do not provide. 

For example, fixed index annuities (FIAs) do not impose a limit on much money you can put into it. The rules let you deposit as much money as you wish, as long as you abide by certain other conditions. While you may have a traditional IRA, 401(k), or another type of insurance plan that qualifies for tax deferral, these products have a maximum contribution limit. This makes fixed index annuities (FIAs) a great choice for retirees who want to save more than an IRA and or a 401(k) will allow. 

Something else to consider is a “rollover” option. It’s possible in many cases to “roll over” your 401(k) or IRA into a fixed index annuity. At Tower Bridge Financial, whatever your financial needs, we are here to help.

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Retiring Early with a Tax-Deferred Annuity

How are annuities taxed if you retire early? You may receive bonus tax benefits, depending on your situation. For these benefits to apply, you must meet a few fundamental criteria. You must be able to check yes to all three situations.

  1. You must be under the age of 59 ½
  2. You have received a large lump-sum payment from your 401(k) profit-sharing plan
  3. This lump-sum payment was part of an early retirement package or severance package

If you answered “yes” to all of the above statements, you could have options.  Your money may be able to “roll over” into an annuity policy, without being taxed. There are a few methods you can obtain this money without being penalized. Usually, if you withdraw funds before you turn 59 ½ there would be a penalty. However, if you set a “Substantially Equal Periodic Payments” (SEPP) program, you may be to get funds from the policy. This a potential tactic to access the money you believed you couldn’t attain until retirement. Deferred annuity taxation can have benefits for retirees.

A tax-deferred annuity strategy allows you to put off taxes on the money you save until you need it for retirement. Contact us at Tower Bridge Financial, today to see if a tax-deferred annuity is an option that’s right for you.

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