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What Are They?
What is a Fixed Tax-Deferred Annuity?
A Fixed Tax-deferred
annuity, also known as a tax-deferred annuity, which is a contract
between you and an insurance company for a guaranteed interest
bearing policy with guaranteed income options. The insurance company
credits interest, and you don't pay taxes on the earnings until you
make a withdrawal or begin receiving money from an annuity.
Tax-Deferred?
Tax-deferred means
postponing your taxes on interest earnings until a future point in
time. In the meantime you earn interest on the money you're not
paying in taxes. You can accumulate more money over a shorter period
of time, which ultimately will provide you with a greater income.
Savings Advantages
Many people today are
using tax-deferred annuities as the foundation of their overall
financial plan instead of certificates of deposit or savings
accounts. Although CD's and Annuities are very similar there are
significant differences between the two. The most important
difference is that annuities allow for the deferral of the taxes due
on the interest earned until the interest is withdrawal! By
postponing the that tax width a tax-deferred annuity, your money
compounds faster because you can earn interest on dollars that would
have otherwise been paid to the IRS. Later, if you decide to take a
monthly income, your taxes can be less because they will be spread
out over a period of years. Like Certificates of Deposits, annuities
have a penalty for early surrender, however most annuity contracts
have a liberal "free withdrawal" provision.
Tax Advantages
You pay NO taxes while
your money is compounding. You can also pay a lower tax on random
withdrawals because you control the tax year in which the
withdrawals are made, and only pay taxes on the interest withdrawn,
Tax deferral gives you control over an important expense - your
taxes. Any time you control an expense, you can minimize it. The
longer you can postpone this particular expense, the greater your
gain when compared to the gain you would make with a fully taxable
account.
The Tax-Deferred
Advantage
To illustrate the
increased earnings capacity of tax-deferred interest, compare it to
a fully-taxable earnings. $25,000 at 6.0% will earn $1,500 of
interest in a year. A 28% tax bracket means that approximately $420
of those earnings will be lost in taxes, leaving only $1,080 to
compound the next year. If these same earnings were tax-deferred,
the full $1,500 would be available to earn even more interest. The
longer you can postpone taxes, the greater the gain.
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