Once funds are invested in an annuity (in a retirement plan, or not) growth of capital, dividends and interest are all tax-deferred. Money in annuities can be tax deductible or non-tax deductible contributions, depending on whether the annuity is within a retirement plan or not. Either way, the growth potential in tax-advantaged investing over an extended period can be remarkable.
As discussed in an earlier unit, the illustration that follows is based on $20,000 invested in a deferred annuity and $20,000 invested in a CD, with both earning eight percent. The CD earnings are taxed each year as received, assuming a 28 percent tax bracket.
|
Results at the End of: |
| |
1 Yr. |
5 Yrs. |
10 Yrs. |
15 Yrs. |
20 Yrs. |
| Taxable CD |
$21,152 |
$26,463 |
$35,014 |
$46,329 |
$61,300 |
| Tax Deferred Annuity |
$21,600 |
$29,387 |
$43,178 |
$63,443 |
$93,219 |
Though "tax-deferred" does not mean "tax free," annuity accumulations are not taxed until distributed either in a withdrawal or in annuity payments. Even then, the amounts contributed to the contract are not taxable.
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