When it comes to tax planning, deferring taxes is one of the best strategies. With this in mind, lets take a look at the tax deffered annuity.
Tax Deffered Annuity
Annuities are often mistaken as modern financial products. In fact, the first annuities were used in ancient Rome. During the time of the Emperors, annuities were known as “annua” contracts paying out one payment a year for the life of the purchaser.
Annuities made their first mark in America during the 18th century, but it wasn’t till the early 1900s that they were offered to the public in general. Annuities really started to grow in the 1930s. Serious concerns about the stock market led planners and insurance companies to come up with a financial tool that was more stable and safe. With the Great Depression, insurance companies were considered a haven of security in times of trouble.
In its simplest form, an annuity is simply a contract in which one party agrees to make consistent payments to another in exchange for a lump sum payment. As time has passed, annuities have grown more varied, offering tailor made solutions for investors. With annual sales in the billions, annuities are one of the most popular investment tools in the modern financial market.
After funding your annuity through a one time payment or periodic payments, you will receive a schedule of payments. The schedule of payments can be set up in different ways to tailor your lifestyle. For instance, if you don’t need money at the moment, the annuity can be tailored to start paying out at a later date, resulting in bigger monthly payments at that time.
Annuity products are set up in two primary ways. When you fund the annuity, you can choose to have the money grow at a fixed interest rate or base it on the performance of financial markets such as the various stock markets. Put another way, you can pick the amount of risk you are comfortable with in the growth.
The tax deffered element of the annuity refers to the growth within the policy. As time passes, the money you have paid into the annuity will grow. This growth is not taxed while it is in the policy, which gives you the benefit of compounding the growth in the policy. The policy, however, is not tax exempt. When you take payments out, you must pay taxes on those payments.
For many people, a tax deffered annuity is considered to be very similar to a 401k retirement account. The primary difference is there is no cap on the amount of money you can put into the annuity.