Deferred-Tax Annuity Plans

The concept behind income annuities is simple. You, the buyer deposit a lump sum or series of payments with an annuity provider. In return, the annuity provider guarantees to pay you a stream of income in the future.

Generally in a deferred annuity contract, monthly or yearly premiums accrue interest and grow to a future date – usually to the age you would like to retire. You can choose when your payments begin and most people choose lifetime payments starting at age 60 or older.

For deferred-tax annuities specifically, these products have the added advantage of growing tax-free until retirement.

Deferred-tax annuity contracts are usually structured into two phases namely the accumulation phase and the payout phase.

During the accumulation phase, interest accumulates on your premiums tax-free until the maturity of the contract. The method in which interest accumulates depends on whether a fixed, indexed or variable rate of interest is chosen.

i. Fixed annuities promise a specific, guaranteed rate of return, regardless of market conditions.

ii. Indexed annuities provide a return based on the performance of a particular market index.

iii. Variable annuities are based on the performance of a portfolio or mutual funds or sub accounts chosen by the annuity holder.

As the purpose of the deferred-tax annuity is to encourage long-term investment, individuals are discouraged from making withdrawals during the accumulation phase. Accordingly, withdrawals during this period may be subjected to surrender charges and taxes.

At maturity, the payout phase begins. From this point on, you’ll receive a regular monthly or yearly income, based on the value the plan accumulated. There may be a guarantee period during which payments would continue to be made even if you pass away.

For example, if you decide to purchase an annuity with a 15-year guarantee period and pass away after 8 years, payments will continue to be made to your chosen beneficiary for the next 7 years.