What Are the Tax Advantages of an Annuity?

Calculating the Advantages of an Annuity

Annuities are a type of guarantee of income later. They are a contract between you and an insurer that can allow you to have a set and predictable income in retirement or currently. In addition, annuities come with tax advantages.

Deposits into an annuity are not tax-deductible, however you don’t have to pay taxes on the interest earned until you begin making withdrawals. This tax-deferral period can have a dramatic effect on the growth of an investment. Use this calculator to compare the tax advantages of saving in an annuity versus an account where the interest is taxed each year such as a CD.


Tax Benefits and Annuities

Annuities are popular with upper-income tax brackets because they provide a guaranteed form of income and provide tax advantages.

The biggest tax advantages of an annuity are that they offer tax deferral with unlimited contributions. There are two types of annuities: deferred and immediate. Immediate give you an income at once while deferred allow you to save money for the future. If you opt for a deferred annuity, you can choose to have your earnings be tax-deferred until you start withdrawing. Since annuities have no limits, unlike many retirement accounts, you can put away as much as you like and save on taxes. If you are in a high-income tax bracket, this solution allows you to save on taxes now and to pay taxes later, when your income may be smaller, and thus your tax burden will also be less.

This is in contrast to mutual funds, where you may be paying taxes on income each year, which reduces the amount your money can grow. However, you need to offset the tax advantage against the fees associated with annuities. Annuities charge many fees, including optional rider fees, investment management fees and others. You need to ensure your tax savings are more than you pay for these costs.

Another thing to consider is that when you start using your annuity, your payments are taxed, just like any other income. If you are considering another form of investment, such as stocks, you may only have to pay long-term capital gains taxes on those earnings — and they may end up being less than the taxes on your annuity withdrawals. You need to consider when you will need the money and your income bracket to determine which type of investment will yield the best tax protections.

Are Annuities Right for Me?

To compare different annuities and to compare an annuity with other forms of investment, Money Help Center has an annuity tax calculator to help you determine how to best invest your money. This calculator helps you get the facts about how much you can save in taxes by using an annuity, which can help you determine whether an annuity is right for you. Before you choose this investment, use Money Help Calculators to determine whether it is a good fit.

Be sure to check out the other Money Help Center calculators to help you make financial decisions. Our unbiased, free calculators are always available for your unlimited use and can be used to create long-term plans or even to draft a budget.