Deferred annuities begin making payments at a future date, usually after you retire. You can invest a lump sum amount or add funds periodically, which will grow tax-deferred over time until you begin receiving payments.
Your investment in a deferred annuity compounds annually tax-free, making it an ideal product to place your money into if you’re looking to save more for retirement. Deferred annuities make up the majority of annuities sold in the U.S.
Deferred annuities have two phases and these are the accumulation phase and the annuitization phase.
The accumulation phase is the period when your money grows. During this time, you can continually put in more money or make deposits in the annuity. You can make withdrawals up to an annual cap, but going over this limit may impose a surrender charge depending on your annuity’s terms. Also, if you withdraw while you’re below 59 ½ years old, the amount may be subject to taxes and a 10% federal penalty regardless of whether it’s within or above the cap.
The annuitization phase, on the other hand, is the time when you will receive payouts from the annuity. Depending on the type of deferred annuity you have, you will receive a fixed income or a variable amount that’s based on the performance of underlying investments within the annuity contract.
Money placed into a deferred annuity can come before income tax, so you can maximize your dollars to work and grow for you. Taxes apply once you begin receiving payments.
You can choose between a fixed or variable rate of growth so the annuity can fit your needs better.
Because they make up most of the annuity market, deferred annuities are numerous, and can be confusing to understand. The different features and combinations can make comparing annuities an ordeal, and without trustworthy financial advice, it would be easy to make a bad investment.
If you do not need income from your annuity immediately, a deferred annuity is the best way to go. However, because of the depth of choices and features available, you’ll need to be very thorough in comparing products and understanding how they work in order to get the best returns.