Most people are familiar with the more popular retirement vehicles available on the market. Whether it is a company sponsored pension plan or an Individual Retirement Arrangement (IRA), most of the vehicles for retirement funds are recognizable. A vehicle that many people have heard of but do not recognize as being geared towards retirement is the deferred fixed annuity. Surprisingly, this insurance product shares some of the same attributes as other retirement plans.
Although there are similarities, a fixed annuity is not designed to function the same as a 401k plan or an IRA account. You typically cannot invest in various financial products or participate in stock-incentive plans through the account. Where fixed annuities are similar to these other vehicles is in their tax treatment.
Deferred fixed annuities have been granted tax-deferred status. This means that growth inside of your annuity account is able to grow income tax-free. Anything that the account earns can be reallocated back to the account without Uncle Sam taking a chunk off the top. If you are unfamiliar with the advantages of this type of growth, you are encouraged to research the compounding effects this sort of arrangement can offer.
As a result of having this tax-deferred growth associated with the annuity, other tax requirements of retirement accounts also apply. The annuity owner must reach age 59 ½ before taking distributions without an additional tax penalty. Early withdrawals result in not only the normal tax implications, but also have the early withdrawal penalty attached.
When properly designed to work inside of a retirement plan, this annuity contract can work quite well. The account created to defer payments until a proper retirement age, and then begin providing a reliable and consistent income payment back to the retiree. Deferred annuities can provide stability and assurance to retirement plans, and can provide an income that the individual cannot outlive.