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Tax-Deferred Annuities
Tax-deferred annuities allow for a higher effective investment return by accumulating
income on a tax-deferred basis. Income tax on the investment growth is postponed until the
money is withdrawn from the contract. Today's annuities provide:
- Competitive interest rates
- Tax-deferred accumulation
- Lifetime annuity income guarantee available
- Guarantee of principal and interest by issuer
- Withdrawals available on demand
An annuity is a contract between an insurance company and an individual buyer. The
contract may be purchased with either a single payment or with a series of payments.
If the annuity is a "fixed" annuity, the issuer guarantees payment of both
principal and interest, subject to certain charges. In a "variable" annuity, the
value of the account can fluctuate up and down with changes in the market value of the
underlying securities owned.
The Value Of Tax Deferral
A tax-deferred annuity offers the same benefits as a non-deductible IRA but without the
$2,000 contribution limit, the mandatory withdrawal requirement at age 70 1/2, and without
all of the record keeping and reporting requirements. Assume the following facts, in a
hypothetical example:
| Initial Sum: |
$20,000 |
| Growth of Taxable Investment: |
6% |
| Growth of Tax-Deferred Annuity: |
6% |
| Current Marginal Tax Bracket: |
36% |
| Tax Bracket at Retirement: |
28% |
No. of Years |
Taxable Investment
at 6% After-Tax
Return 3.8% |
Premium to
Annuity at
6% No Tax |
Before Tax
Additional
Accumulation
With Annuity |
Taxes Paid
at Time Withdrawn
from Annuity at 28% |
Net Savings
With Annuity |
5 |
$24,136 |
$26,765 |
$2,618 |
$1,892 |
$ 724 |
10 |
$29,153 |
$35,817 |
$6,664 |
$4,429 |
$2,236 |
15 |
$35,197 |
$47,931 |
$12,735 |
$7,821 |
$4,914 |
20 |
$42,494 |
$64,143 |
$21,649 |
$12,360 |
$9,289 |
25 |
$51,303 |
$85,837 |
$34,534 |
$18,434 |
$16,099 |
30 |
$61,940 |
$114,870 |
$52,930 |
$26,564 |
$26,366 |
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