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Tax Deferred Annuities
Many people today are using tax-deferred annuities as the cornerstone of their overall financial plan instead of other financial instruments. An annuity is a contract that has unique and valuable features. Chief among them is that the annuity offers income tax deferral until the money is withdrawn. This allows the annuity value to increase at a faster rate than investments that are currently taxed. ¹
The example below illustrates the increased earnings capacity of tax-deferred interest, compared to fully taxable earnings.
| |
Annuity |
Taxable Investment |
|
Investment |
$ 50,000 |
$ 50,000 |
|
Projected Earnings at 5% |
$ 2,500 |
$ 2,500 |
|
Assumed Current Income Tax – 28% bracket |
$ 0 |
$ 700 |
|
Net after-tax earnings |
$ 2,500 |
$ 1,800 |
|
After-tax value of investment |
$ 52,500 |
$ 51,800 |
With the annuity the full $2,500 of earnings would be available to
compound and earn even more interest. The longer you can postpone
taxes, the greater the gain.
¹ Under current tax law, earnings withdrawn before age 59 1/2 may be subject to IRS penalty.
Income and growth on accumulated cash values have been held by the Tax Court to be generally taxable only on withdrawal. Consult your tax advisor or attorney on your specific situation
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