Deferred Annuity

Basics and a Know How Guide

A Deferred Annuity allows for tax deferred growth of funds. You do not get taxed on any gains unless you take a withdrawal. If your annuity is held as a Roth IRA, then your proceeds will not be taxed as well.

There are two kinds of annuities: Fixed Annuity - which is a deferred annuity and an immediate annuity. In the case of immediate annuity, the person starts getting an income the moment he/she makes an investment. But it is not so in case of annuities that are deferred.

In these annuities, the person makes an investment over a period of time and then starts getting an income only after a certain length of time has elapsed. This length of time is determined at the time of buying the annuity.

An annuity is the essentially a reverse process of a life insurance. In the case of life insurance, you pay a small amount periodically and if you die before the life insurance expires, your family gets a large amount. In the case of the annuity, you pay a large amount periodically and keep receiving small amounts of money throughout your life.

Talking about these annuities, it is a perfect investment option for those looking to secure their retirement years. A big advantage with this annuity is the fact that one does not have to pay any taxes as long as there is no withdrawal or one has not started receiving an income from it.

However, that said, a this annuity has its limitations as well. The biggest limitation of this kind of annuity is that you cannot withdraw more than a specified amount at one time. This means that you cannot fulfil your large needs at one go with this kind of investment. If you do so, you would attract a hefty penalty which is pre decided by the insurance company.

This is not a disadvantage of this annuity per say but is a limitation nevertheless. For this reason, this annuity is best suited for people who are not expecting any major changes in their lifestyle. Also, it is always better to keep a small portion of your assets outside the annuity so as you are not totally dependent on the annuity to fulfil your needs.

It is very important to weight the advantages and limitations of an annuity before you decide to take the plunge. Because after all, it is your hard earned money and you do not want to squander it away before giving it a proper thought. Hence, consulting an insurance expert before investing in an annuity is of paramount importance.

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