Nevada Annuities

What are Deferred Annuities?

Deferred Annuities

Deferred annuities are annuity contracts that delay payments of income, installments or a lump sum until the individual elects to receive them. Hence, the title deferred annuities. One of the many advantages of tax deferred annuities is the tax bracket you’re in when you start receiving the income payments.

Deferred Annuities are most appropriate for individuals who want to save for retirement, find an investment that will earn tax-deferred interest for many years to come or are simply looking for a more attractive savings rate than that offered by bank CD’s.

With deferred annuities, you can put in as much money as you want. Unlike Individual Retirement Accounts (IRAs), there is no IRS restriction on the amount that can be contributed annually to deferred annuities.

You will enjoy the good fortune of earning interest on the amount you would normally have paid in taxes during the accumulation period. Hopefully many years go time by and you’re in a more favorable tax bracket than the one you were in during the accumulation period. Most states’ tax laws on deferred annuities follow the federal law.

A deferred annuity has two main phases. The first is the savings phase. This may seem obvious but it is in this phase a person puts money into their account. The second phase is called the income phase. It is in the income phase that the plan converts into an annuity with payments being made to the annuitant.

A popular feature of a deferred annuity is its tax deferral. This means earnings on a deferred annuity account are not taxed as they are paid to the annuitant. They are taxed only upon withdrawal. Another nice feature of the deferred annuity is compounded interest.

Compounding interest simply means each subsequent year you will be credited interest on the current account value of the contract, not just the original deposit.

Even then they are subject to what the IRS calls an exclusion ratio. The exclusion ratio takes into account the fact that each payment received is made up of both principal and interest. It is the interest portion of the payment that is taxed.

This type of annuity provides another benefit. It is a death benefit. Should the annuitant die before the contract is complete, the beneficiary of the annuity is guaranteed to receive both the principal and the investment earnings.

While a deferred annuity does not fit into everyone’s investment portfolio, it does provide attractive options. The sharp money manager will keep deferred annuities in the bull’s eye of their investment considerations if for no other reason than the tax deferral option.