Know more about Tax Deferred Annuity & Deferred Annuity
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Every human being wants to save money for the future as future is unknown. In order to save money for future it is necessary to invest in present. There are many tools through which one can get good returns in future by investing now. Tax Deferred Annuity is one of such tools. But to understand Tax Deferred Annuity it is important to know about Annuity.
Annuities can be defined as flexible contracts usually sold by insurance companies designed to provide financial help to the annuity holder at a specified period of time, generally after retirement.
Annuities are of two types: Fixed annuity and variable annuities. Fixed annuities guarantee a certain amount of return and in variable annuities there is no guarantee but there are chances of higher returns. An annuity also has a death benefit which is equal to the higher current value of the annuity or the amount the holder has paid. Actually, all annuities are tax-deferred. The holder is taxed only when they start withdrawing money from the account.
Tax Deferred Annuity can be defined as an annuity in which income tax on the invested income is charged only when the holder starts receiving periodic payments and not during the investment period. These are sold by the insurance companies. Annuities generally have two phases: one is the accumulation phase and the other is the payment phase.
During the accumulation phase the annuity is purchased by making payments to it either in lump sum or on installment basis. Then the value of the annuity purchased will grow depending on the type of annuity (whether fixed or variable annuity) and the interest rate set by the insurance company. Here the annuity grows tax deferred during this accumulation phase. And income tax will be charged only when one chooses to withdraw gains from annuity. Withdrawals from annuity can be made at any point of time but they are subjected to tax.
Deferred Annuity has an added advantage because it provides gradual saving for retirement and in addition to this it reduces the tax burden as well because it is likely that the annuity holder will be in a lower tax bracket on retirement rather than while working.
Tax deferral provides this added advantage due to the time value of money. Tax deferral is a powerful tool and it becomes more rewarding with higher interest rates, higher tax brackets along with longer maturity date.
Tax deferred annuity is not such a complex issue, but it is important to understand it clearly. It aims to provide more benefit to the annuity holder and therefore it is necessary to understand various tax aspects in annuity. Therefore, it is strongly advisable to seek the help of a qualified financial professional when considering annuities for retirement plans. Therefore make sure to invest wisely in annuities so as to avoid any unpleasant circumstances. This will eventually help you to retain a good credit rating and also keep you away from the woes of debt.
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