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.