Every year in April, income taxes take center stage. While taxes may be unavoidable for most Americans, some financial products and investments—including annuities—may be more tax-advantaged than others.
Annuities are considered “tax-deferred” products. This means that any interest they earn is not taxed until you take the money out. For example, the most basic annuity, the fixed deferred annuity, earns a fixed rate of interest for a specified number of years. Unlike other financial products, that interest is not taxed every year. It is only taxed when you take your money out.
Annuities have advantages that could make them an important part of your retirement portfolio.
For you, this has several advantages:
- Your money can grow tax-deferred. By leaving more money in your annuity that would otherwise be lost to taxes, interest in your annuity grows through compounding.
- Your tax rate could be lower. Annuities are generally designed as retirement products. When you do eventually take your money out for retirement, you could be in a lower tax bracket and keep more of your money.
- Pay less in income tax later. If you convert your annuity’s accumulated value into regular income payments over time, only a portion of these payments will be taxed, as the rest is considered your original purchase payment.1
Talk to a professional
Annuities have additional advantages that could make them an important part of your retirement portfolio. To learn more about fixed deferred and other types of annuities, and whether they’re the right products for you, talk to your financial professional.