The Advantages of an Annuity
|
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withdrawals because you control the tax year in which the withdrawals are made, and only pay taxes on the interest withdrawn, Tax deferral gives you control over an important expense - your taxes.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.
|
Tax Deferred vs. Non Tax Deferred Results
|
Tax Deferred Amount
|
|
Value of your Tax Deferred Account:
|
50,000
|
|
|
|
Current Interest Rate
|
5%
|
|
|
|
|
|
|
|
|
Taxable Account
|
|
|
Value of your Taxable Account:
|
50,000
|
|
|
|
Current Interest Rate:
|
5%
|
|
|
|
Tax Bracket
|
.30%
|
|
|
|
|
|
|
Tax Deferred Account
|
Taxable Account
|
|
|
Balance
|
Interest
|
Value
|
Balance
|
Interest
|
Value
|
Difference
|
|
|
|
|
|
|
|
|
|
50,000
|
2,500
|
52,500
|
50,000
|
1,750
|
51,750
|
750
|
|
52,500
|
2,625
|
55,125
|
51,750
|
1,811
|
53,561
|
1,564
|
|
55,125
|
2,756
|
57,881
|
53,561
|
1,875
|
55,436
|
2,445
|
|
57,881
|
2,894
|
60,775
|
55,436
|
1,940
|
57,376
|
3,399
|
|
60,775
|
3,039
|
63,814
|
57,376
|
2,008
|
59,384
|
4,430
|
|
|
|
|
|
|
|
|
|
63,814
|
3,191
|
67,005
|
59,384
|
2,078
|
61,463
|
5,542
|
|
67,005
|
3,350
|
70,355
|
61,463
|
2,151
|
63,614
|
6,741
|
|
70,355
|
3,518
|
73,873
|
63,614
|
2,226
|
65,840
|
8,032
|
|
73,873
|
3,694
|
77,566
|
65,840
|
2,304
|
68,145
|
9,422
|
|
77,566
|
3,878
|
81,445
|
68,145
|
2,385
|
70,530
|
10,915
|
|
Hammond insurance does not give tax or legal advice. The comments regarding tax treatment on this website simply reflect our understanding of current interpretations of tax laws as they apply to annuities. Since tax laws are always subject to interpretation and possible changes in the future. we recommend that you seek counsel of your attorney, accountant or other qualified tax advisor regarding annuity taxation as it applies to your particular situation.
|
|
|
