Tax deferral means not paying federal income tax now, but in the future when you take withdrawals from your retirement savings account like a 401k, IRA, or an annuity.
This means that you will be earning interest on money that you would otherwise pay taxes on.
Your savings grow faster than they would if your gains were taxed each year.
The longer you defer taxes, the better especially if you expect to be in a lower tax bracket during retirement.
If you purchase your annuity with after-tax dollars, you will only pay ordinary income taxes on your earnings when you begin withdrawing money (not on your premium payments).
Unlike your 401k or IRA, annuities don’t have any government-imposed contribution limits.
Because of that, they can often be a good choice if you want to save more than IRAs and 401(k)s allow and still enjoy tax-deferred growth potential.
Purchasing an annuity within a retirement plan that already provides tax deferral results in no additional tax benefit.
So use an annuity to fund a qualified retirement plan based upon features other than tax deferral, such as lifetime income options or the guaranteed death benefit.
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