Tax-Deferred Annuities
Tax-deferred annuities have money in a policy account that have potential to earn indexed interest, over time. However, they may be able to grow without immediate taxes. Of course, once you take money out, there may be an income tax you have to pay. But, while your money is in the annuity, you may be able to hold off on paying those taxes. This means the money may be able to grow without a tax implication until later. The benefit of this is you don’t pay tax on the whole amount in your policy. Instead, you pay tax on only the amount you withdraw. Tax-deferred annuities are one way to potentially change the overall impact of taxes on your retirement.
Another way tax-deferred annuities may help in retirement is by giving you another place to secure your money. For instance, social security benefits may decrease if your income exceeds a certain amount. Therefore, if you have bonds, CDs, or other retirement income, you may see your social security benefit amount drop. That’s because the interest from certain financial vehicles counts as income. Income is, of course, used to determine your tax liability. However, your potential index interest, over time in an annuity is not income. When you take money out, you are subject to tax. But not prior to that.
Post-Tax Dollars
If you decide to get a fixed index annuity (FIA) policy using the money you’ve already paid tax on, those are post-tax dollars. Tax-deferred annuities, such as an FIA, have an accumulation phase and then a distribution phase.
First, you allow your money to stay in the FIA and do not take out any money. Indeed, this is the reason this phase is the accumulation phase – your money has time to potentially accumulate. Importantly, this potential index interest is not typically subject to tax. You pay your tax on the withdrawal of your money in the form of an income. Typical income taxes are paid at that time.
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Retirement Accounts and FIAs
What about IRAs and 401(k)?
While these may also provide tax deferment, they are not tax-deferred annuities like an FIA is. Unlike a traditional retirement account, an FIA does not have federal restriction limits on how much you can contribute. There are, of course, rules about what percentage of your total assets may be put into an FIA depending upon your situation. But, in contrast to a 401(k) or IRA, that amount isn’t restricted in the same way. If you have additional money that you want to keep safe, you may consider learning more about an FIA.
Or, maybe you want to be able to save more money. You might be looking for something other than a traditional savings account since that is only protected by the FDIC for up to $250,000. Of course, always be sure to seek the consult of a qualified tax advisor regarding any tax implications in retirement. At Safe Retirement Solutions, we love to help clients learn more about their options for savings in retirement.
Early Retirement & Tax Deferred Annuities
If you decide to take an early retirement due to a job loss, an FIA may be something to consider. Of course, certain conditions and terms apply. Take a look at the criteria in the box to the right. If you meet all of these conditions, than an FIA may be something you want to look into due to the potential that tax deferred annuities may bring.
Is an FIA the right choice for you?
- Are you younger than 59 1/2?
- From your previous employer, did you get a lump sum payment(from your 401(k) profit-sharing plan)?
- Was this payment (the lump sum) the result of a severance package or an early retirement package?
If you answered, "Yes," to all of the above conditions, an FIA could be something you might consider.
Why? Because you could potentially use a “rollover” strategy to put the lump sum payment into tax-deferred annuities. In some cases, this strategy would be a taxable event. Or, you may be able to defer taxes. The other potential benefit is that you may avoid a penalty for accessing your retirement money too early. With “Substantially Equal Periodic Payments” (SEPP), however, your money could be available as income sooner. Even if you thought you could not have access to those funds until later in retirement, there may be ways of using tax-deferred annuities to help.
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