What Is a Deferred Annuity?

A deferred annuity can be an effective option for turning your savings into a predictable, lifetime income stream in retirement. The more you invest, the greater the potential guaranteed payouts. Read on to learn how this financial product works, and why you might consider making it part of your retirement plan.

How do deferred annuities work?

You buy an annuity from an insurance company and fund it by making deposits (paying premiums). A deferred annuity allows you to grow your money without having to pay taxes on your earnings until you withdraw it.

The earnings on an annuity prior to payout are based on the type of annuity purchased. A fixed-rate annuity is the most straightforward type, with your earnings guaranteed to grow at the rate stated in your contract. With some annuities, the insurance company can even credit a higher rate for a period of time.

Which tax-deferred annuity is right for you depends on how much you have to invest, how long until you retire and when you want to receive payments. Amica Life offers two fixed-rate annuity options*:

• Single Premium Deferred Annuity (SPDA) − If you have liquid assets that are available now, you can make a lump-sum contribution within the first year that grows until you’re ready to start receiving payouts. This type of annuity usually pays higher rates than savings accounts or bank Certificates of Deposit.
  
• Flexible Premium Deferred Annuity (FPDA) − If you’re saving for retirement and balancing contributions with more immediate expenses, like paying a mortgage or supporting children, you can customize how much and how often you put money in before retirement. Many people make regular deposits, while others are more flexible in when they make their investments. It’s totally up to you.

SPDAs and FPDAs with fixed rates have several advantages:

• Predictability − Once you’re ready to receive payouts, you can choose when and how often to receive them: monthly, quarterly, semiannually or annually. You’ll have a steady income stream that isn’t affected by market fluctuations.
• Growth − You won’t pay any taxes while your money is earning interest, so what you put in may grow faster than it would in a taxable account with the same interest rate.
• Flexibility − You can increase your premiums when you no longer have competing financial priorities. Meanwhile, you have a guaranteed minimum interest rate while your account grows. You can get the benefit of higher interest if rates rise before you begin payouts, but also have the protection of knowing that rates will never go below the floor in your annuity.

In addition, there’s a death benefit. If you die before collecting on the annuity, and you didn’t select lifetime payments, your heirs get the amount you contributed, plus investment earnings, minus whatever cash withdrawals you made and applicable taxes or penalties.

How do interest earnings accumulate in a deferred annuity?

Fixed annuities guarantee you’ll earn at least a minimum interest rate. The insurance company sets the interest rate.

The period in which the principal earns interest and grows is known as the accumulation phase. When you decide you’re ready for income payments, you can convert the money you invested into regular payments as part of your retirement plan. This is the distribution phase, and you can spread the payout over a specific period of time or across the rest of your life.

Do you pay taxes on the retirement income from a deferred annuity?

All annuities are federally tax-deferred. You choose the amount you want to save, with no federal tax due on the earnings until you withdraw the money, which is then taxed as ordinary income.

Some states tax annuity premium payments at the time you pay the premium. If a state does impose a premium tax, your insurer may deduct it from your premium and pay it for you, then credit the remaining amount to the accumulation value as of the date they receive your premium.

What’s the benefit of a deferred annuity?

This savings instrument can be appealing if you’re looking for tax-advantaged growth and guaranteed retirement income.

• You don’t pay taxes until you withdraw the income, allowing you to earn interest on the money that would have gone to the IRS each year.
• It provides a retirement income for your entire lifetime.
• You know today what your guaranteed income can be in retirement.
• You can use withdrawals from deferred annuities to pay for any expense, including long-term care or medical bills.
• There’s no medical underwriting with a deferred annuity, which offers an alternative to leaving a death benefit for beneficiaries if you can’t get life insurance.

On the other hand, while a tax-deferred annuity has many benefits, it’s not for everyone. Here are some of the drawbacks:

• They’re long-term contracts that range from two to 20 years. If you take money out in the first years of the contract, you might have to pay early withdrawal penalties from the insurance company.
• You can’t collect income from your annuity until age 59½ without being subject to a 10% IRS penalty.

A tax-deferred annuity gives you the opportunity to contribute to your financial future as life allows, so keep the possibility in mind as you map your strategy for retirement. An Amica Life annuity specialist can easily help you determine which one is right for you. Learn more or call 844-786-0697 today.