Immediate vs. Deferred Annuity
An immediate annuity is primarily used as a vehicle for distributing savings with a tax-deferred growth factor, and is commonly used to provide retirement income.
Distributions may be either level or increasing periodic payments for a fixed term of years or until the ending of a life or two lives, or even whichever is longer. It is also possible to structure the payments under an immediate annuity so that they vary with the performance of a specified set of investments, usually bond and equity mutual funds. Such a contract is called a variable immediate annuity.
For tax purposes, every payment received is a combination of a return of principal (which is not taxed) and income (which is taxed at ordinary income rates, not capital gains tax rates).
A deferred annuity is primarily used as a vehicle for accumulating savings with a view to eventually distributing those savings as an immediate annuity or as a single lump-sum payment. Gains in account values (due to capital gains or ordinary income) are not taxed until those gains are withdrawn. This is known as tax-deferred investment growth. The compounding of tax-deferred income and gains provides a greater investment base on which to generate higher returns.
September 5, 2010
Types of Annuities
Frequently Asked Questions
Examples
