Deferred Annuities
A deferred annuity is an agreement with an insurance company to pay the owner a regular income or a lump payment at a later period.
Deferred annuities are frequently used to complement other retirement income sources, such as Social Security.
Deferred annuities are not the same as immediate annuities, which start paying out straight away.
How Do Deferred Annuities Work?
Fixed, indexed, and variable deferred annuities are the three fundamental types. Fixed annuities give a set, guaranteed rate of return on the money in the account, as their name implies. Indexed annuities give you a return based on the success of a market index, such as the S&P 500. The performance of a portfolio of mutual funds, or sub-accounts, chosen by the annuity owner determines the return on variable annuities.
What To Consider Before Purchasing A Deferred Annuity
Tax-deferred growth is available in all three types of deferred annuities. Owners of these insurance contracts only pay taxes when they withdraw money, accept a lump amount, or start receiving income from the account. The money they receive is taxed at their regular income tax rate at that point.
The accumulation phase is the time when the investor makes payments into the annuity (or savings phase). The payout phase (or income phase) starts when the investor decides to start receiving money. Many deferred annuities are set up to pay out for the rest of the owner’s life, as well as the life of their spouse.
The Benefits Of Deferred Annuities
Deferred annuities let savings grow without current taxes, which can build value faster over time. You choose when income begins, including options that can last for life. Many contracts protect principal when using fixed or indexed designs, allow contributions without IRS caps, and include beneficiary features so value can pass to loved ones.
Tax-Deferred Investment
During the accumulation phase, owners do not pay any taxes. Once the distribution phase begins and the owner begins to receive payments, taxes become due.
Benefits That Last A Lifetime
Insurance firms will promise lifetime income for you or your spouse if you annuitize your contract.
Protection In The Event Of A Loss
The majority of delayed annuity contracts provide built-in protection against principal loss or give guaranteed rates of return.
There Are No Contribution Limits
Unlike IRAs and 401ks, there are no restrictions on how much money you may put into a deferred annuity.
Benefits Upon Death
A death benefit is included in deferred annuity contracts. If you die before the conclusion of the annuity contract, any residual assets will go to your surviving heirs.
The Drawbacks Of Deferred Annuities
Access to funds can be limited by surrender periods and withdrawal rules, so liquidity needs should be planned outside the contract. Earnings are taxed as ordinary income when withdrawn and may face a federal penalty before age 59½. These factors make it important to balance growth goals with cash needs and overall tax strategy.
Lack Of Liquidity
During the first few years of the contract, annuitants are unable to withdraw any money from their annuity unless they pay a surrender price. You’ll also have to pay a penalty to the Internal Revenue Service if you withdraw money before you’re 59 and a half.
High Tax Rates On Earnings
The IRS taxes annuity earnings at the ordinary income rate, which may be greater than the capital gains rate applied to equities, mutual funds, and exchange traded funds, because annuity contracts grow tax-deferred.
Get Started With A Deferred Annuity Through Matador
Reach out to Matador Insurance today to discover more about how deferred annuities might help you achieve your retirement objectives