Tax Benefits

In today's economy, taxes consume a significant portion of most investment returns. An annuity accumulates your long-term wealth on a tax-deferred basis. As your accumulated value grows, you pay no current taxes on earnings, which means there's more money to compound and it grows faster than if it were taxed every year. Upon withdrawal, usually at retirement, you simply pay the tax due. The chart below compares the difference in returns between a taxable and tax-deferred investment.

If you are purchasing an annuity to fund a tax-qualified retirement plan (IRA, SEP, SIMPLE IRA), you should be aware that this tax deferral feature is available with any investment vehicle and is not unique to an annuity. Carefully consider the features and benefits of the annuity before making the decision to purchase it.

Each investment begins with $50,000 and earns 5% per year - compounded monthly - for 20 years. At the end of 20 years, the tax-deferred investment grows to $135,632, whereas with the annual tax rate of 31%, the value of the taxable investment only grows to $99,587 - a difference in accumulated value of $36,045! Even when you apply the necessary taxes upon withdrawal from the tax-deferred investment, your ending balance in the tax-deferred investment is still $9,499 greater than the ending balance of the taxable investment.

Please note: The above illustration is hypothetical, and does not represent any particular investment. No withdrawals prior to year 20 are assumed above, but any withdrawals (in excess of the free surrender charge privilege) during the first seven to nine years after a purchase payment would be subject to a surrender charge, which varies by product. Some products also have 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.

Withdrawals of tax-deferred accumulations are subject to ordinary income tax. If you choose to withdraw the $135,632 at the end of the 20-year period (when you're 59½ or older) and pay the normal taxes ($26,546 at the 31% tax rate), you would still be ahead. You could 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 59½, there is an additional 10% IRS penalty.

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