Taxes and Annuities!
If you participate in a 401(k) plan at your place of employment or if you own an individual Retirement Account (IRA), you're already enjoying the benefits of tax-deferred accumulation. Many annuity products also offer this advantage.
So what is tax deferred mean to you?
With tax-deferred products, you don't pay taxes on accumulated funds, interest or dividends until you actually withdraw the money. Since the gain in a tax-deferred product isn't taxed until it's withdrawn, it usually accumulates at a faster rate. For this reason, tax-deferred accumulation can provide a powerful financial edge.
Tax deferral strategies work best for retirement planning. The idea is to leave the money where it is for a long time. Sure you'll be taxed on the money you start to withdraw after you've retired but you may be in a lower tax bracket by then, which will be in your favor. You can be selective in your withdrawals and plan them so that you do not suffer unnecessary tax consequences.
Retirement Note: Shelter investment earnings. Retired people can use annuities to shelter investment earnings that would otherwise lead to taxation of Social Security benefits.
No-penalty rollovers: Company pension or profit-sharing plan pay outs may be reinvested without incurring taxes or penalties.
Tax Warning: You will probably be in a lower tax bracket when you retire and begin receiving your annuity income, but there is no guarantee of it. By the time you retire, tax rates may have risen, saddling you with a higher tax bill than you would have paid had you taken your investment income earlier.
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