What is a Deferred Annuity?
A Deferred Annuity is a type of investment designed to accumulate funds on a tax-deferred basis until a payout phase, often chosen as retirement. Unlike immediate annuities, where payments start shortly after a lump-sum deposit, deferred annuities allow the invested funds to grow over a period of time before withdrawals begin. This setup is particularly beneficial for those planning for retirement, as it allows their savings to grow tax-free until they start taking payments.
Deferred annuities come in two primary forms: fixed and variable. A fixed deferred annuity offers a guaranteed rate of return, providing stability in the investment, while a variable deferred annuity ties its returns to market performance, allowing for potential growth but with associated risks. In both types, the funds are generally locked until the agreed-upon distribution phase begins, and early withdrawals may incur penalties.
This type of annuity can be beneficial for individuals looking to supplement other retirement savings, like a 401(k) or an IRA. Many individuals use deferred annuities to create a reliable income stream for their later years. Additionally, funds in a deferred annuity grow tax-free, which can be advantageous for long-term retirement planning. However, individuals should consider factors such as fees, tax implications, and surrender charges before investing in a deferred annuity.
For those in the market for senior life insurance or planning with a long-term perspective, a deferred annuity can offer a complementary approach by providing future income and financial security. Given its ability to grow funds tax-deferred, this product is often integrated into broader retirement planning strategies.