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Deferred Annuities Offer Tax Advantages to Consumers


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Deferred annuity products can offer tax advantages for people looking to grow their wealth as they head towards retirement. In a recent article for Wealth Management, “The Tax Advantages of Deferred Annuities,” Nationwide Insurance wrote about how some annuities offer consumers important tax advantages. People use annuity products to create a steady income stream during their retirement, income that can often last for as long as they live. But in addition to paying you an income stream, annuities can allow you to grow your wealth without paying taxes on that money until you begin withdrawals.

Nationwide’s director of business development for variable annuities said that advisors can help clients preserve their wealth by recommending deferred annuities for their tax deferral benefits. Advisors need to know what their clients expect for their future in order to help these clients meet their income and retirement goals. Annuity products can be either immediate or deferred. Each of these types of annuities can either be fixed or variable. Fixed annuities are good for consumers who don’t want to take on a lot of risk or just prefer having a set amount of income for their retirement. Variable annuity products allow the chance to grow your money at the risk of your income guarantees. Some people prefer having a portfolio that contains both types of annuities to take advantage of both benefits.

The big advantage to deferred fixed and variable annuities is that your income grows tax-free until you start receiving annuity income payments. While your annuity is in the accumulation phase, you don’t have to pay any taxes on the growing money. There are some things for advisors and their clients to consider when it comes to deferred variable annuities. Once you start withdrawing money from your annuity, your income is taxed at ordinary tax rates. Since you won’t likely receive income until you are retired, your tax rates will be significantly lower than they were during your working years. There could be a tax penalty of 10% if you take money out before you turn 59 1/2. Also, early withdrawals will lower your death benefit and your annuity’s cash value. Keep in mind that you can transfer money between investment options free of taxes or penalties.

Consumers with a high net worth can really benefit from the tax advantages of deferred annuities because they have often maxed out their other tax-deferred investment options. While most annuities are not bought solely for their tax advantages, it is an important benefit for many consumers and can save quite a bit of money in the long run. Deferred annuities offer tax advantages by deferring your taxes until you start receiving withdrawals and are typically in a lower tax bracket.

Written by Rachel Summit

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