Deferred Annuities

Deferred annuities can be a great way to accumulate money for retirement, if you want retirement income beyond what you will receive from Social Security or your pension plan. They are particularly effective if you have many years before retirement. Your money grows tax deferred, which means you pay no taxes on earnings until you begin to withdraw your money.

A deferred annuity is not a vehicle for money you may need for current needs. If you withdraw income before age 59½, the IRS will usually apply a 10% penalty in addition to ordinary income tax, similar to the penalty for early IRA withdrawals. What's more, your insurer may impose its own early withdrawal penalty, also known as surrender fees, if you cash in your deferred annuity within a specified period. These fees, similar to withdrawal penalties on a CD, usually cease seven years after your date of purchase. Often there is a separate surrender fee for each payment. So, a new payment may have a 7% fee if you take the new payment out right away, while a 10-year-old payment may have no surrender fee. The fee will usually decrease and be eliminated over time. Keep in mind, however, you can often withdraw small amounts (e.g., 10%) annually without any penalty from your insurer, but the IRS penalty may still apply.

How Do I Withdraw Money from a Deferred Annuity?

When you're ready to begin to withdraw from your deferred annuity, you can decide how to receive your money. You can take it all out in a lump sum, take it as needed, or receive it in a steady stream of periodic payments – "annuitizing." If you annuitize your payments, you can receive a stream of income that is guaranteed to continue for the rest of your life, no matter how long you live. And, the tax liability can be spread out for the rest of your life too. Some of the earnings are included in each payment and are taxable, meanwhile, any earnings continue to accumulate tax-deferred on the remaining principal and earnings that have not yet been distributed. So, receiving distributions as periodic payments after retirement may further reduce your income tax liability, if you are in a lower tax bracket. Some annuities also provide you with an option to have a set amount, determined by you, automatically withdrawn and deposited directly in your bank account during a regularly scheduled period, such as monthly. You have many options on how you receive your money, each with its own tax ramifications. Consult your tax or financial advisor to tailor a plan for your particular needs.

Why Should You Buy a Deferred Annuity?

There are a number of good reasons to consider a deferred annuity as part of your retirement plan:

• You postpone paying income taxes on any earnings until you withdraw money, typically during retirement, when you may be in a lower tax bracket. This means that all earnings grow tax-deferred allowing you to accumulate money faster.

• 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 with your after-tax money. You can, however, use a deferred annuity to fund your traditional or Roth IRA, in which case you would operate within IRA limitations.

You can provide death benefits to your heirs. If you die prematurely, your annuity can offer a death benefit to your beneficiaries without the costs and delays of probate. Your beneficiaries will never receive less than what you have contributed (less any withdrawals). In addition, a spouse who inherits an annuity before distribution has begun can step in as the new owner of the annuity and the tax deferral continues until amounts are withdrawn. If distribution payments had begun, the benefits would generally have to be distributed to the beneficiary at least as rapidly as through the method in effect at the time of the annuitant's death. Taxation will continue to apply to those proceeds. Generally, a beneficiary who inherits an annuity before distribution begins can request a lump sum distribution without penalty but will be subject to full taxation on the accrued interest or gain on the contract.

One of the best way of determining which Deferred Annuity is right for you is to get the sound advice of a knowledgable advisor. Click here if you are ready to find out which deferred annuity is best for you.