A deferred annuity grows, tax deferred, until the contract is annuitized (put into a payment stream) or surrendered (paid out as a lump sum).
A deferred annuity contract is chiefly a vehicle for accumulating savings and eventually distributing the value — either as a payment stream or as a one-time, lump-sum payment. All varieties of deferred annuities have one thing in common: the increase in account value is not taxed until those gains are withdrawn (or paid out). This is also known as tax-deferred growth.
The tax-deferred status of deferred annuities has led to their popularity. In the U.S. tax code, the benefits from annuity contracts are not required to be taken as a fixed stream of payments and many contracts are purchased primarily for the tax benefits and not to get a fixed stream of income.
People will often talk of the affect of “triple-compounding” of annuity growth because the account will earn interest on
An immediate annuity guarantees payments, which start right away, for a specified time period or for a lifetime.
This contract is generally used as a way to generate income payments. These periodic payments may be either level or increasing and designated for a fixed term or until death, in one of several combinations.
The chief characteristic of an immediate annuity is the contract’s ability to distribute savings with a tax-deferred growth factor. The U.S. tax code dictates that every annuity payment is a combination of return of principal (is not taxed) and payout of income (is taxed at normal-income rates, not capital-gain rates). This has the benefit of stretching the tax payments over a longer time period. A common use for an immediate annuity is converting accumulated savings into an income stream during retirement.
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Note that a 10% IRS penalty may apply to any withdrawals taken prior to age 59½; this penalty would be in addition to any normal taxation of the withdrawal.
The following applies if the annuity is purchased through a bank or a credit union: (a) the annuity is not a deposit; (b) the annuity is not guaranteed by any bank or credit union; (c) the annuity is not insured by the FDIC or any other governmental agency; (d) the purchase of an annuity is not a provision or condition of any bank or credit union activity; and (e) some annuities are subject to investment risk and may go down in value.
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