Chapter 3-6 Tax Deferred Annuities

A fixed tax-deferred annuity, also known as a tax-deferred annuity, is a contract among you and an insurance company for an ensured interest pertinent policy with guaranteed income alternatives.  The insurance company credits interest, and taxes are not paid on the profits until you take money out or start receiving annuity income.  Your annuity contract makes an aggressive return that is extremely safe.  Tax-deferred signifies deferring your taxes on interest gains until a determined time in the future.  Simultaneously, you get interest on the money that you are not paying in taxes.  You can accrue more money over less time, which eventually will give you more income.

Numerous people today are utilizing tax-deferred annuities as the basis of their overall financial plan rather than certificates of deposit or savings accounts.  The biggest difference between annuities and CD’s is that annuities permit the postponement of the taxes owed on the interest gained until the interest is taken out.  By deferring the tax with a tax-deferred annuity, your principal compounds quicker since you can make interest on the money that you would have been paid to the IRS.  If you choose to receive a monthly income later on, your taxes can be lower since they will be divided over a period of years.  Similar to CD’s, annuities have a penalty for early surrender, but the majority of annuity contracts have a fair free withdrawal clause.  Tax deferral gives you authority over your taxes, which are a considerable expense.  Whenever you have authority over an expense, you can decrease it.  The more you can defer this specific expense, the more your profits will be when compared to the profits you would have made with a completely taxable account.

A tax-deferred annuity is secure.  The insurance company providing the annuity is obligated to satisfy its responsibilities to you as set forth in the contract.  Their reserves have to be equivalent to the withdrawal amount of your annuity policy at all times.  Besides the reserves, state law also necessitates specific levels of money and surplus to increase policyholder security.  Legal reserve pertains to the stern financial obligations that have to be satisfied by an insurance company to secure the money deposited by every policyholder.  These reserves must be equivalent to the withdrawal amount, money plus interest minus early withdrawal fees, of all the annuity policies, at all times.  State insurance laws also necessitate that a life insurance company has to keep specific minimum levels of money and surplus, which offer added security to policyholders.

During the time that your annuity is compounding it is fully tax-deferred without any withholding tax.  If you ask for a distribution, either a withdrawal or annuity income, taxes will be held back unless you choose otherwise.  Your decision not to withhold can be made when you ask for a distribution.  Since the interest is tax-deferred, it is not obligatory to send out a Form 1099 throughout the time that your money is compounding.  A Form 1099 will only be sent when your interest is distributed, as either withdrawal or annuity income, showing the total interest acquired.

An annuity policy does not mature the same way a bond or CD does.  Your money as well as your interest accrued will automatically keep gaining interest until it is either taken out or you reach the age of 100.  You can allow your money to keep growing, execute withdrawals, or start getting an annuity income at your convenience.  An IRS penalty tax, which at this time is 10 percent, will be due on any withdrawal of interest or qualified premium that is made before 59 ½ years of age.  The accruing funds in your annuity may be passed on to your assigned beneficiaries if you were to die before the annuity expires while avoiding the cost, delay, chagrin, and publicity of the probate process.  Similar to the majority of assets, the annuity is a component of your taxable estate and your beneficiaries can decide to receive one individual payment or guaranteed monthly income.

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