The Features of Deferred Annuities

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The Features of Deferred Annuities

A deferred annuity is so named because the annuitant does not begin to receive payments until some date in the future. While it is possible to purchase a deferred annuity with one lump sum payment, typically investors use deferred annuities to build up capital over a period of years, often to provide retirement income. Deferred annuities are distinct from immediate annuities, in which the payout period begins immediately after the annuity is purchased.

Things To Know

  • The annuitant begins to receive payments at some date in the future.
  • The value of the account grows on a tax-deferred basis.

Tax-deferred growth

One feature of deferred annuities is that the value of your account grows on a tax-deferred basis: that is, you pay no tax on your earnings until you receive them during the payout period. Annuities can be part of a tax-qualified retirement program, such as a 401(k) or pension plan; or they can be used in the form of tax-sheltered annuities (TSAs) as part of 403(b) plans, which are retirement plans used by nonprofit organizations. Both qualified plans and TSAs receive contributions on a pre-tax basis. Annuities can also be part of individual retirement arrangements (IRAs) receiving deductible contributions. Nonqualified annuities are not part of these tax-advantaged retirement plans; individuals purchase them with after-tax dollars.