What is a Tax-Deferred Annuity Plan?

Start thinking ahead, What kind of retirement are you imagining for yourself and what steps are you taking to make those dreams a reality? Are you putting enough money into savings? Are you taking advantage of all available retirement saving options? One option that can be used for planning your retirement is a tax-deferred annuity plan.

A tax-deferred annuity plan is a long-term investment contract that can grow, tax-deferred. The money that is contributed to an annuity is tax-deferred. This means that you can contribute money before taxes. No tax forms to file and no income that you need to report. Actually, you only pay taxes when you withdraw your money. During the time between when you contribute funds and when you withdraw them, it is possible for your money to grow significantly. Later, when you make a withdrawal, you pay taxes at that time.

Deferred annuity taxation can also be used to assist retirees in getting the most out of their other retirement accounts. For example, if your income is over a certain amount you may see a decrease in your social security benefits. So, if you earn interest from CDs, bonds, or other investments the income must be reported to the IRS. In some instances, this can cause social security benefits to drop. But if you place your money in as an annuity those earnings do not count against you. Of course, once you take out the money there is taxation. But, deferring taxes while your money grows can yield great benefits.

Retiring Early with a
Tax-Deferred Annuity Plan

For some early retirees, fixed index annuities can provide additional tax savings. In order for these benefits to apply, you must meet a few key criteria. You must be able to check yes to all three conditions.

  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 all three of the above criteria apply to you, you may be in luck! Your money may be able to “rollover” into an annuity policy, without being taxed. There are a few ways you can access this money without being penalized. Normally 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 money from the account. This a possible strategy to access you money you thought you couldn’t touch until retirement. Deferred annuity taxation can definitely have its benefits for retirees.

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