The Power of Tax Deferral
Taxes consume a portion of the returns of most investments. Annuities allow you to accumulate assets on a tax-deferred basis. The money you invest can earn a return, and that return can earn a return. You don't pay taxes on any of it until you make a withdrawal or start receiving income payments - usually at retirement. Since you choose when to take withdrawals and, in turn, pay taxes, you may benefit by paying less in taxes by withdrawing at a time when you are in a lower tax bracket.
The chart below compares two $50,000 investments, each earning 10% per year compounded monthly for 20 years. In one scenario, taxes on earnings are deferred until a withdrawal is made at the end of 20 years. In the other, the 10% investment earnings are taxed each year at a rate of 28%. At the end of 20 years, your hypothetical tax-deferred investment grows to $366,404 ($277,811 after taxes), compared to $210,128 in the investment that's not tax deferred.
Please note, the above Illustration is hypothetical, and does not represent any particular investment.
The Principal Investment Plus Variable Annuity has a mortality and expense risks charge of 1.25%. No withdrawals prior to year 20 are assumed above, but any withdrawals(in excess of the free surrender charge privilege) from the annuity during the first seven years after a premium payment would be subject to a surrender charge between 2% and 6%. May vary with the Premium Payment Credit rider. There is also a $30 annual fee for contracts with less than a $30,000 accumulated value on the contract anniversary. If these fees and charges were included in the illustration above, the tax-deferred performance would have been lower. Lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the accounts shown.
Withdrawals of tax-deferred accumulations are subject to ordinary income tax. If you choose to withdraw the $366,404 at the end of the 20-year period (when you're 59 1/2 or older) and pay the normal taxes ($88,593 at the 28% tax rate), you are still ahead compared to the currently taxable investment. With the Principal Investment Plus Variable Annuity, you can also annuitize (to spread the tax and benefit payments over a period of years) instead of taking a lump sum withdrawal. If the withdrawal is prior to age 59 1/2, there is an additional 10% IRS penalty.
Changes in tax rates and tax treatment of investment earning may impact the comparative results. You should consider your personal investment horizon and income tax bracket, both current and anticipated, when making an investment decision as these may further impact the results of the comparison.
Values in separate account subaccounts are not guaranteed and will vary from day to day.
Before investing in a variable annuity, investors should carefully consider the investment objectives, risks, charges and expenses of the contract and the underlying investment options. This and other information is contained in the free prospectus and, if available, the summary prospectus, which can be obtained from your local representative or call 800.852.4450. Please read the prospectus and, if available, the summary prospectus, carefully before investing.
Insurance issued by Principal Life Insurance Company. Securities offered through Princor Financial Services Corporation, 800.852.4450, member SIPC, Des Moines, IA 50392.