Tax Deferred Annuity - Tax Exemption Adding to Income Growth
By: Mike Anderson
Submitted: 2011-07-20 22:38:14 | Word Count: 561
Annuity is a long-term contract between an investor and an insurer. Irrespective of its wider varieties, the basic criteria remains unaltered. Every annuity is a product requiring the individuals to invest at one go or in regular installment in exchange of which the insurance company provides guaranteed income flow. However, the income distribution does not start immediately but from a scheduled date. Of diverse types of annuities, tax deferred annuity is receiving attention from the potential investors. It is because; this variety is the perfect investment vehicle to accelerate income growth. This model is designed with a view to providing the income either in the manner of an immediate annuity or as a lump-sum amount.
Irrespective of its different varieties, every tax deferred annuity owner enjoys tax exemption of income growth in account values till the gains are not withdrawn. That is why; it is justifiably referred to as tax-deferred growth. Deferred annuity is broadly classified into two categories – fixed and variable. Recently, the investors have been inducted to another type, called fixed indexed annuity. This model has been introduced in the market only in 1995.
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Fixed tax deferred annuity grows by earning interest rate that remains the same throughout the accumulation period. Therefore, it is the preferred choice for those who are unlikely to carry higher risk. On the other hand, interest rate of the variable tax deferred annuity is volatile in nature. It may hit the plateau and go on increasing. In that case, the investors will surely earn extra. But if the rate tends to take a nosedive, then it will not be a pleasant scenario for the annuitants. In case of the variable variety, no guarantee is made by the insurer that the account value will be more than the initial figure of investment.
Fixed indexed tax deferred annuity is a hybrid of both the fixed and variable types. A minimum return is guaranteed in this case. However, the annuitants may lose in the event of early cancellation of policy before the "break even" period. In finance speak, the fixed indexed annuity income equals to the specified "participation rate" multiplied by the performance of a target stock market index excluding dividends. In the United States, tax deferred annuity is a preferred choice due to the possibility of significant surge in income level. However, tax deferment facility can only be enjoyed until the capital gains are not withdrawn. Retirement annuity is another good choice for the individuals. Generally, this annuity is purchased by the retirees or those on the verge of retirement. At the time when the prices of the essentials are going through the roof, this annuity can surely bring a shower of relief for the senior citizens by distributing regular income till their last breath.
The tax deferred annuity model is generally sold by the agents working directly for an insurance company. However, some financial professionals work as an independent body and not as employees of the insurance companies. This second category gets commissions from the insurer for selling each tax deferred annuity scheme. An annuitant must pay attention to his personal financial goals to choose the best policy from the available offers.
