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 in vested 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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