Deferred annuities are a type of contract issued by insurance companies for individuals who wish to save on a tax-deferred basis. Annuities generally extend over a period of time before the accumulation value is converted into a guaranteed monthly payment at retirement. Annuities can be a good fit for those who seek a steady income stream over their retirement years. There are two main types of tax-deferred annuities: variable and fixed. Learn more about how a tax deferred annuity can give you more control over your tax liability and what benefits variable and fixed annuities offer.
Tax Deferred Variable Annuities
Like any tax deferred annuity, a variable annuity is a contract with an insurance company. However, unlike other annuity products a variable annuity is composed of an insurance portion and self-directed investment portion. A variable annuity permits the accumulation of capital on a tax-deferred basis. It also fluctuates based on changes the market may experience over time.
This differs from a fixed annuity which offers a guaranteed interest rate regardless of what changes may occur in the market. When comparing variable annuity products, remember that they are a long-term investment generally designed for retirement purposes.
Introduced in the 1950s, variable annuities were offered as an alternative to fixed annuities. Variable annuities allow investors to take advantage of more than a dozen managed subaccounts that consist of different asset classes, such as bonds, stocks, and money market funds. Investors then have the opportunity to earn a higher rate of return which boosts the amount of capital they can accumulate.
Variable annuities also act as a variable income stream. Your investments can be set up so that they rebalance automatically on a pre-determined schedule, like quarterly or annually. You can also log into your online account and redirect your investments as needed.
There are a number of advantages that come with a variable tax deferred annuity. One of the most attractive is the ability to have higher long-term returns than a fixed annuity due to the ability to choose your own investments. However, you must also consider that your investments could possibly suffer due to declines in the stock market. If you are an investor with a long time frame of 20-plus years, you may benefit from using a variable annuity to maintain fixed-income investments that would usually generate taxable interest income annually.
Tax Deferred Fixed Annuities
Similar to CD investments issued by insurance companies, a tax deferred fixed annuity pays guaranteed rates of interest. These annuities can be either deferred or immediate with the deferred option accumulating regular rates of interest and the immediate option making fixed payments.
Fixed annuities offer the predictability and convenience of set payouts which make them a popular choice among retirees who wish to supplement their income stream. This type of tax deferred annuity is an excellent option for individuals who want a guaranteed rate of return without putting any risk on the principal.
There are many great benefits that come with a fixed annuity, including a tax deferral. The annuity’s tax-deferred status allows individuals to take advantage of compound growth. Fixed annuities also offer principal and interest protection while still providing ample opportunity to grow money at a fixed interest rates.
The interest rates on fixed accounts are often higher than with traditional savings accounts. Another major benefit is the flexibility to choose from different payout options. If you choose to annuitize your contact for lifetime income, you can set payments for a lifetime stream of income or for a specified period.
Unlike many other investment products, fixed annuities have low investment minimums that generally range between $1,000 and $10,000. Fixed annuities also have the advantage of beneficiary protection. This means that you can pass any assets onto your chosen beneficiaries while also avoiding costly probate.
There are a number of factors you should consider when purchasing a fixed annuity. It is important to understand that without market participation, the opportunity for growth on fixed annuities is minimal compared to variable annuities. However, there is less risk. Rates may also be inconsistent. You may find that some rates are offered for a fixed period of time before they change.
Learn More About Tax Deferred Annuity
Tax deferred annuities allow investors to put away a larger amount of cash while deferring taxes. Also, unlike other types of tax-deferred retirement accounts like IRAs and 401(k)s, tax deferred annuities have no annual contribution limits. This maximizes the amount that you can put away for retirement. Money put into tax deferred annuities compound year and year without the nuisance of tax bills, allowing every dollar that you deposit to continue working for you. At retirement, you can take a lump-sum payment from your annuity or use it as a steady stream of income. For more information about variable or fixed tax deferred annuities, contact professional financial consultants.