Pursuing a high rate of return is what motivates many investors, but managing investments for tax efficiency is just as important to long-term success, particularly for investors in the highest tax brackets. With a non-qualified deferred annuity, as noted, the single payment or periodic payments consist of money on which the annuitant has already paid income taxes. Tax-deferred does not mean tax-free.
Tax-deferral means that the interest (fixed annuities) or earnings (variable annuities) are not currently taxed. Instead, taxation is deferred to a future date when the interest or earnings are actually withdrawn from the contract. Deferred annuities are one of the few investments still available that enjoy such tax-favored treatment.
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