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Immediate vs. Deferred Annuities


Annuities may not be as well known as some other retirement tools. However, annuities account for 8% of all assets earmarked for retirement. Annuities total to nearly $2.3 trillion in assets, and annuities also hold more funds than Roth IRAs.


So what is an annuity? Simply put, an annuity is a contract with an insurance company. In this contract, the insurance company agrees to make regular payments to the buyer of the contract for a premium (or a series of premiums). The funds held in an annuity contract accumulate during that time while also being tax-deferred.


Unlike most other tax-deferred options, annuities are not subject to contribution limits. This makes annuities more attractive for individuals interested in accumulating retirement assets. In other words, retirement-minded individuals can set aside as much money as they would like into an annuity.


Two Stages of an Annuity

Annuity contracts pass through two stages, the accumulation stage and the payout stage. During the accumulation stage, the funds accumulate until the annuity contract reaches its payout date. At that time, the total will either be paid out as a lump sum or as a series of payments over a period of time that can stretch as long as the account holder’s life.

The funds attributed to the initial premium will not be taxed, but any earnings on those funds will be taxed as regular income.


Immediate Annuity

An immediate annuity is structured to provide immediate income. After paying the initial premium, an individual receives a regular income. That income can be deferred for up to 12 months. The funds remaining in the contract accumulate on a tax-deferred basis.


Deferred Annuity

Another annuity option would be to purchase an annuity contract that defers payout until a specific date in the future. The premiums that you would pay to a deferred annuity accumulate and earn interest during the accumulation phase. The annuity holder then determines the amount for their payments and when the payouts begin. Most contract holders choose to wait until retirement for their annuity payout. With a deferred annuity, the earnings credited to your contract are taxed when they are withdrawn.


Annuities have contract limitations, fees, and charges. These charges include account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities also have surrender fees that are usually higher if you pull money out in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities are not guaranteed by the FDIC or any other government agency.


For retirement-minded investors, annuities have some attractive features that may be worth exploring. Annuities also have certain limitations and expenses that need to be considered before committing to a contract.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.



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