Deferred Fixed Annuity
The Deferred Payout Structure
Whatever the annuity purchased, there are essentially two distribution options: immediate or deferred. Deferred annuities function like a piggy bank: during the accumulation phase the account collects money and grows tax deferred. Once the contract expires, typically 5-10 years down the line, the accumulation phase ends and dispersal begins. Dispersal takes the form of a single large payout or a long string of smaller monthly payouts.
Think of deferred fixed annuities as CDs, accumulating interest over time. This contrasts with fixed immediate annuities, which pay out in monthly installments from the get-go until the entire premium, plus interest, gets depleted.
Even though deferred annuities are intended to accumulate money, most allow for premature withdrawals up to a certain point. Virtually all fixed deferred contracts feature an annual withdrawal provision, which stipulates the amount that can be withdrawn without incurring a penalty. Beyond this limit, fees are incurred as set forth by the contract's withdrawal schedule.
Deferred Annuity Benefits
The most important benefit deferred annuities have over their immediate counterparts and CDs is tax-deferral. Because annuity income isn't taxed until it's withdrawn, and withdrawals are not made in the case of deferred annuities for as many as 10-20 years, would-be tax payments have time to earn money. Whereas a CD would be taxed yearly, a deferred annuity balance earns interest on the IRS's money.
The advantages of tax-deferral really start to kick-in over time, so it's in the deferred annuity investor's interest to opt for longer terms. An ideal deferred annuity investor starts saving for retirement early and gives plenty of time for the account to compound.
Another important benefit of deferred annuities is their multi-premium nature, allowing you to start with a smaller investment. One problem with immediate annuities is that they need to be funded with large up front premiums, which isn't always available. This is necessary because payouts start immediately and there's no time for your money to grow. A deferred annuity, however, like a 401(k), is designed to accommodate continuing contributions throughout the contract term. This allows investors to start small and work their way up to a sizeable retirement nest egg incrementally.
Don't Just Shop, Implement a Solid Retirement Strategy
Purchasing an annuity is a big decision. Online research is a good start, but prudent investors should discuss all their options and risks with an independent financial advisor. Request a free, no-obligation consultation today, along with a report of current rates on brand-name annuities.Speak with an advisor over the phone about annuities for FREE.
Who Should Buy Deferred Fixed Annuities?
The key difference between immediate and deferred investments is the function they're designed to fulfil. An immediate annuity is appropriate when you require consistent monthly income, as for retirement. A deferred annuity is appropriate when you want to put money away for retirement, but not use it today.
If you're already retired, or need a steady stream of income, immediate fixed annuities are the best choice. If you're just starting to save for retirement, or still have 5-10 years before you need the money, deferred annuities offer a better return.
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