Immediate Vs. Deferred Annuities

Despite not being as well known as some other retirement tools, annuities account for 8% of all assets earmarked for retirement. With about $2.3 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 12 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.

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 With a deferred annuity, the earnings credited to your contract are taxed when they are withdrawn.

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Disclaimer: 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 ...

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Robert Carroll 1 month ago Member's comment

Thanks for the share

Duanne Johnson 1 month ago Member's comment

Yes, a good article.