Tax Benefits
In today's economy, taxes consume a significant portion of most investment returns. The Principal Investment Plus Variable Annuity accumulates assets for the long term on a tax-deferred basis. As the assets grow, taxes do not consume any growth. 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 a Principal Investment Plus Variable 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 Principal Investment Plus Variable Annuity before making the decision to purchase it.
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 the return of any particular investment product. The Principal Investment Plus Variable Annuity has a mortality and expense risk 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 purchase payment would be subject to a surrender charge between 2% and 6% (may vary with the Premium 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, therefore 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.
