Power Of Tax Deferrals: High Investment Returns
An annuity is a sort of insurance contract signed by an individual at the time of paying money to a life insurance company. The money then grows under these policies which is tax deferred and can be distributed to the individuals in various ways. Some individuals use this contract first to accumulate funds and then make a quick withdrawal while others use it is as an income for life feature. Annuities are classified into two types namely fixed annuities that offer guarantee based interest rates and variable annuities that offer a range of investment options.
Tax Deferred Annuity program Many individuals who plan for their retirement prefer tax deferred annuity program because it defers taxes due on interest generated until the interest is fully withdrawn. This greatly assists in generating more of compound money as compared to fully taxed saving plans. It also generates high investment returns. Accumulation and Payout Stages Annuities undergo two stages. The first stage is the accumulation stage and the second is the payout stage. During the accumulation phase, you make payments to the purchase of annuities either in one go or in an on-going basis. Then the annuity's value grows by the interest rates set up by the company. The annuity's growth depends upon the type of annuity you own. The growth rates will be fixed in case of fixed annuity and will be variable in case of variable annuity. But both the types of annuities hold one thing in common: they both grow tax deferred during the accumulation phase. Tax-deferred annuity does not mean tax-free investment. Tax-free means no income taxes on gains. Whereas, tax-deferred annuities charge taxes on gains but only if we choose to withdraw these gains. Lets understand tax-deferred annuities with the help of the following example. Suppose, an individual is under a 28% tax bracket and has a savings amount of $10,000. He then places this amount in a saving type of account for around ten years. He is taxed over every gain he acquires over this amount at the end of the year. His final comes out to be $15,000 approximately. Now consider another individual with the same tax percentage and amount. Instead of investing in saving account, this intelligent person purchases an annuity. He will also be taxed on gains but only when he thinks of withdrawing this money. Thus, his final amount turns out to be $18,000 approximately. This is because intelligent thinking helped him to reap the benefit of the tax-deferral advantage. This way, he earned interest on money that the first individual has paid every year in the form of taxes. So the difference between investing money in a saving account and investing in a tax-deferred annuity is clear. Thus, you know what to opt for because a tax deferral annuity enjoys the power of tax deferral. |
