Retirement Read Time: 4 min

Immediate vs. Deferred Annuities

Despite not being as well known as some other retirement tools, annuities account for 6% of all assets earmarked for retirement. With about $2.6 trillion in assets, annuities hold more funds than Roth IRAs.1

An annuity is a contract with an insurance company. In exchange for a premium or a series of premiums, the insurance company agrees to make regular payments to the contract holder. The funds held in an annuity contract accumulate tax deferred.

For individuals interested in accumulating retirement assets, annuities can be attractive because they are not subject to contribution limits, unlike most other tax-deferred vehicles. In other words, retirement-minded individuals can set aside as much money as they would like into an annuity.

Two Phases

Immediate and Deferred Annuities

Annuity contracts pass through two distinct phases: accumulation and payout. During the accumulation phase, the funds accumulate until the annuity contract reaches its payout date. At that time, the total will either be paid out as a lump sum or as a series of payments over a period that can stretch as long as the account holder's life.

The funds attributed to the initial premium will not be taxed, but any earnings on those funds will be taxed as regular income.

Immediate Annuity

As its name implies, an immediate annuity is structured to provide current income. After paying the initial premium, an individual receives regular income, which can be deferred up to twelve months. The funds remaining in the contract accumulate on a tax-deferred basis. And only that portion of each payment attributable to interest is subject to taxes; the rest is treated as a return of principal.

This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your tax strategy.

Deferred Annuity

It is also possible to purchase an annuity contract that defers payout until a specific date in the future. The premiums you pay to a deferred annuity accumulate and earn interest during the accumulation phase. The annuity holder determines the amount of payments and when the payouts begin, which is usually in retirement. With a deferred annuity, the earnings credited to your contract are taxed when they are withdrawn.

Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). The guarantees of an annuity contract depend on the issuing company's claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency.

Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions and may be worth more or less than the original amount invested if the annuity is surrendered.

For retirement-minded investors, annuities have some attractive features that may be worth exploring. Annuities also have certain limitations and expenses that need to be considered before committing to a contract.

1. ICI.org, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

How Stocks Work

How Stocks Work

Understanding how a stock works is key to understanding your investments.

Global vs. International: What’s The Difference?

Global vs. International: What’s The Difference?

International funds invest in non-U.S. markets, while global funds may invest in U.S. stocks alongside non-U.S. stocks.

Do You Have Financial Vampires in Your Life?

Do You Have Financial Vampires in Your Life?

Financial vampires can take a lot out of you, are there any in your life?

 

Have A Question About This Topic?







Thank you! Oops!

Tax-Advantaged Health Care Planning for Retirement

Heading into retirement with confidence is easier if your planning includes steps to minimize taxes, especially as it relates to health care planning.

Can Group, Private Disability Policies Work Together?

Loss of income from disability has the potential to cause financial hardship. Disability insurance can help.

A Penny Saved is Two Pennies Earned

Here are some simple and inexpensive energy-saving tips that may help you save money.

View all articles

What Is the Dividend Yield?

This calculator helps determine your pre-tax and after-tax dividend yield on a particular stock.

How Much Home Can I Afford?

With a few simple inputs you can estimate how much of a mortgage you may be able to obtain.

Impact of Taxes and Inflation

Estimate the potential impact taxes and inflation can have on the purchasing power of an investment.

View all calculators

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.

5 Smart Investing Strategies

There are some smart strategies that may help you pursue your investment objectives

Long-Term-Care Protection Strategies

The chances of needing long-term care, its cost, and strategies for covering that cost.

View all presentations

Once Upon a Goal

Do you know how to set up your financial goals for success? This knight does.

Retirement Redefined

Around the country, attitudes about retirement are shifting.

Estate Management 101

A will may be only one of the documents you need—and one factor to consider—when it comes to managing your estate.

View all videos