Tax Deferment Using AnnuitiesTax deferment increases the positive compounding effect for your asset growth. The typical non-IRA type of investment plan is unable to take advantage of this strategy. Fortunately, several types of annuities provide numerous opportunities for the average individual to invest on a tax-deferred basis. There are four categories available to the general public:
Variable annuities offer a wide selection of investment options. This is similar... but not exactly the same... as mutual funds. In addition, they usually offer money market and guaranteed principal separate account options. Immediate annuities generate income right now. There is no accumulation period; consequently, no tax deferment. However, the income can be fixed or it can vary each month based on market performance. Indexed annuities typically offer a minimum guaranteed interest rate as a foundation for the accumulation phase. Each year the average annual return of an Index (eg. the S&P 500 Index) is credited. If it's zero or negative, the minimum guarantee kicks in. This allows the holder to benefit from the price increase of the Index while having some protection on the downside should the Index decrease in value. The majority of annuities that accrue on a tax deferred basis have a substantial charge if you surrender the annuity before 7 to 9 years. With the immediate annuity you give up 100% of your principal at the time of purchase. So, there's nothing to surrender. Federal income tax is postponed on the accumulation until such time as you make withdrawals. Be aware... any amount withdrawn from an annuity is subject to a 10% penalty tax if you are not at least 59 and one-half years old. This is not the case, however, if the withdrawals are:
The federal income tax savings with an immediate annuity depends on how much of your principal has already been taxed. For example, if IRA money, which has benefited from long-term tax deferment, is used to fund an immediate annuity then 100% of the income will be subject to income tax. This is because your original IRA principal... as well as the earnings on the principal... have never been taxed. On the other hand, if an immediate annuity is funded with money that has already been taxed, then a prorated portion of the income is subject to future state and federal income tax as it is distributed. If you have large amounts of money in certificates of deposits (CDs) and this money is for long-range potential emergencies, then you might wish to consider a fixed annuity. CDs are paying very low interest rates these days. But, you still have to pay federal income tax each year when you receive your Form 1099; therefore, your net return can be pretty sad. Fixed annuities pay higher guarantees then CDs, plus you usually have the opportunity to receive bonus interest credits and future rate increases. The income tax deferment (no Form 1099) adds icing to the cake. Just make sure you understand the surrender charges and how the company determines future interest rate credits to your account. There is an ongoing controversy as to whether it's appropriate for an IRA (Individual Retirement Account) to be funded with an annuity. Some believe the federal income tax savings aspect of the annuity is wasted because the accumulation in an IRA is tax deferred anyway. Therefore, it is said, the underlying cost of the annuity can't be justified. While this is a compelling theory, many variables must be considered -- not the least of which is the guaranteed lifetime income benefit provided only by an annuity. If you convert a fixed or variable annuity into an immediate annuity... you will begin to receive a predetermined income stream that can last your entire lifetime. Today more than ever before, people are concerned about income. And, using an annuity intelligently can be quite valuable... whether it's for the tax deferment or the guaranteed income. Annuities are issued only by life insurance companies. While you might be able to buy one at your local bank, the annuity contract itself will always be underwritten by an insurance company. Be sure to learn something about the financial strength of the life insurance company. Don't just take the salesperson's word for it.
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