What is a Fixed Tax-Deferred Annuity?
A Fixed Tax-deferred annuity, also
referred to as a tax-deferred annuity, is a contract
between you and an insurance company for a
guaranteed interest bearing policy with guaranteed
income options. The insurance company credits
interest, and you don't pay taxes on the earnings
until you make a withdrawal or begin receiving an
annuity income. Your annuity contract earns a
competitive return that is very safe.
Tax-Deferred?
Tax-deferred means postponing your taxes on interest
earnings until a future point in time. In the
meantime you earn interest on the money you're not
paying in taxes. You can accumulate more money over
a shorter period of time, which ultimately will
provide you with a greater income.
Savings Advantages
Many people today are using tax-deferred annuities
as the foundation of their overall financial plan
instead of certificates of deposit or savings
accounts. Although CD's and Annuities are very
similar there are significant differences between
the two. The most important difference is that
annuities allow for the deferral of the taxes due on
the interest earned until the interest is
withdrawal! By postponing the that tax width a
tax-deferred annuity, your money compounds faster
because you can earn interest on dollars that would
have otherwise been paid to the IRS. Later, if you
decide to take a monthly income, your taxes can be
less because they will be spread out over a period
of years. Like Certificates of Deposits, annuities
have a penalty for early surrender, however most
annuity contracts have a liberal "free withdrawal"
provision.
Tax Advantages
You pay NO taxes while your money is compounding.
You can also pay a lower tax on random withdrawals
because you control the tax year in which the
withdrawals are made, and only pay taxes on the
interest withdrawn, Tax deferral gives you control
over an important expense - your taxes. Any time you
control an expense, you can minimize it. The longer
you can postpone this particular expense, the
greater your gain when compared to the gain you
would make with a fully taxable account.
The Tax-Deferred Advantage
To illustrate the increased earnings capacity of
tax-deferred interest, compare it to a fully-taxable
earnings. $25,000 at 6.0% will earn $1,500 of
interest in a year. A 28% tax bracket means that
approximately $420 of those earnings will be lost in
taxes, leaving only $1,080 to compound the next
year. If these same earnings were tax-deferred, the
full $1,500 would be available to earn even more
interest. The longer you can postpone taxes, the
greater the gain.
Tax-Deferred vs. Fully Taxable
Compare the Return
$107,297 Accumulated in a Tax-Deferred Annuity
$71,966 Accumulated in a Taxable Account
The Difference:$35,331
Note: That at an annuities guaranteed rate of 4%,
the return after 25 years would be $66,646.
Safety
Your tax-deferred annuity is safe. A qualified legal
reserve life insurance company is required to meet
its contractual obligations to you. These reserves
must, at all times, be equal to the withdrawal value
of your annuity policy. In addition to reserves,
state law also requires certain levels of capital
and surplus to further increase policyholder
protection. Legal reserve refers to the strict
financial requirements that must be met by an
insurance company to protect the money paid in by
all policyholders. These reserves must be at all
times, equal to the withdrawal value (principal plus
interest less early withdrawal fees, if any) of
every annuity policy. State insurance laws also
require that a life insurance company must maintain
certain minimum levels of capital and surplus, which
provide additional policyholder protection.
No More 1099's
There is no withholding tax while your annuity is
compounding; it is completely tax-deferred. If you
request a distribution (random withdrawals or
annuity income), taxes will be withheld - unless you
elect differently. Your election not to withdraw can
be made at the time you make your request. Because
the interest is tax-deferred, it is not necessary to
issue a From 1099 while your money is compounding.
Only when your interest is distributed (withdrawal
or annuity income) will a Form 1099 be sent,
reflecting the amount of interest actually received.
When Does My Money Mature
An annuity policy does not "mature" like a bond or
certificate of deposit. Both your principal and
interest will automatically continue to earn
interest until withdrawn or you reach age 100. You
can let your money continue to grow, make
withdrawals, or begin receiving an annuity income at
any time.
What is the Penalty Tax and When Does it
Apply?
An IRS penalty tax, currently 10%, mat be payable on
any withdrawal of interest or qualified premium made
prior to age 59 1/2.
Avoid Probate
If a premature death should occur, the accumulating
funds within your annuity may be transferred to your
named beneficiaries, avoiding the expense, delay,
frustration and publicity of the probate process.
Like most assets, the annuity is part of your
taxable estate. Your heirs can chose to receive a
lump sum payment, or a guaranteed monthly income.
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