Understanding Deferred Annuities

The robust benefits of a deferred annuity account can occur whether you invest in a variable, fixed, or indexed annuity account. The taxes that are gained during the accumulation period is simply “deferred” or put off until the time you make your first withdrawal at a later date. This allows the investor to grow his account without receiving a 1099 for every tax year for that account’s growth.

Annuities are saving vehicles and contracts that are backed by insurance companies and which deliver a return on investment for those investors who purchase them. Annuities are often compared to CDs or Certificates of Deposits, which generate interest over a period specified time. Deferred annuities, unlike traditional CDs however, are saving instruments that are allowed to accumulate assets over time without being taxed on that income growth. Yet, if you withdrawal from your account before you turn 59.5 years of age, the standard penalty is about 10% is applied. Of course, that additional income also results in the paying taxes in your particular tax bracket at the time of the withdrawal.

Often, your “deferred” annuity account can changed to an “immediate” annuity after a particular period of time has passed – such change in the type of annuity is often written in the language of the contract. An immediate annuity will immediately deliver payments to the investor at a percentage he established for a particular period of time. Aside from particular tax savings, other options can be given with a deferred annuity such as the ability to include a designated beneficiary that would guarantee payment for your loved ones in case of death.

A variable deferred annuity is a unique investment opportunity as it allows you to invest particular percentages in a variety of mutual funds, which are often referred to as “sub-accounts,” and which vary in yield and risk. Your return on investment will ultimately depend on the performance of each of those “sub accounts” in your portfolio. A variable annuity also allows for the standard fixed-rate annuity and can provide another layer of stability for those adverse to higher levels of risk.

Depending on which kind of deferred annuity you have you, investors may have the flexibility to transfer money from one annuity investment to another, without being taxed. However, you may have to incur charges from the actual insurance company to transfer those funds. Nevertheless, this gives the investor a bit more flexibility in where to keep his or her money.

In addition, some deferred annuities allow you to skip paying taxed until only the time the money actually distributed back to the investor, in which case the investor would pay an income tax at their standard rate. Payments taken before retirement or before the age 59.5, investors will have to pay a penalty fee as you do with other similar annuities, which is usually 10%.

During the distribution period an investor can also choose to have their investment plus earnings given to you in one “lump sum” or you may choose to receive payment installments for a specific period of time. Payout payments can be determined for a specific period of time, such as 25 years, and can be paid out in a manner that is indicative of their market performance. You will be taxed for the payments you receive on the interest that you earned. For example, if an investor contributed $100,000 and earned $50,000 for a total of $150,000, he or she would only have to pay taxes on that $50,000.