What is a Deferred Annuity?
A deferred annuity is a type of financial product designed to provide income during retirement, structured to delay payments until a specified future date. It is primarily used as a retirement savings vehicle and can be a vital part of retirement planning.
Key Features
- Tax-Deferred Growth: Earnings on investments in a deferred annuity grow tax-deferred until you withdraw them. This means you don't pay taxes on the investment gains until you start receiving payments.
- Contribution Flexibility: You can make lump-sum payments or scheduled contributions over time, allowing you to tailor your investment strategy to your financial situation.
- Withdrawal Options: Typically, you can access your funds through surrender withdrawals after a set period, though early withdrawals may incur penalties.
- Income Guarantees: Many deferred annuities offer options for guaranteed income, ensuring that you will receive a stable income during retirement.
Types of Deferred Annuities
There are generally two types of deferred annuities: fixed and variable. A fixed deferred annuity guarantees a minimum interest rate, providing safe, reliable growth. In contrast, a variable deferred annuity allows you to invest in various sub-accounts, which can offer higher returns but come with increased risk.
Conclusion
Deferred annuities can be a strategic choice for individuals looking to enhance their retirement savings. By delaying income, these financial products can potentially provide greater payouts and tax advantages in retirement.