With a deferred annuity, you agree to a long-term contract between you and an insurance company where you will not begin to receive payments until a designated period of time has passed after your initial investment.
Deferred annuities often earn much more than their immediate annuity counterparts due to the length of the investment. They are given much more time to grow and accrue interest while growing tax-deferred, meaning that the investor only needs to pay taxes on the annuity once they receive payment.
Where Are Deferred Annuities Most Common?
These investments are made most commonly as a means for retirees to have a secured income and are almost always more fruitful if one waits to receive return on their investments until after the age of 59 ½. Deferred annuities are often used in conjunction with social security benefits and other investments to give retirees a continued means of income.
Types of Deferred Annuities
Deferred annuities allow investors to make decisions based upon their preferences in regards to interest rate, age of return, and risk level. People are also able to choose distribution options that fit their needs.
● Fixed Rate — With a fixed rate of return, your annuity is guaranteed to grow at the agreed rate for the lifetime of the annuity.
● Variable Rate — With a variable rate of return, your annuity is invested into multiple sub-accounts like stocks or bonds and give investors the option for financial growth or loss.
● Longevity — longevity annuities have many benefits, but the annuitant must wait until they are 80 to receive their funds.
● Equity Index Annuity (EIA) — Equity index annuities work just like variable rate annuities, but they have a guaranteed rate of minimum return, unlike variable annuities. This type of account is ideal for those worried about negative stock growth.
There are typically three methods of distribution available for annuities:
● Lump sum — Lump sum annuities are paid in full at one time.
● Periodic — Periodic or systematic withdrawal annuities are paid through a series of taxed payments.
● Annuitization — This annuity has time-based distributions that take place over an agreed-upon period.
Qualified Deferred Annuities
All deferred annuities are tax-deferred as well. Being tax-deferred means that they will be taxed upon the time of payment. Possessing a qualified annuity means that the investment funds used to purchase the annuity were not taxed. These funds can come from tax-eligible accounts such as:
● Personal IRAs
● Contribution plans
● Employee Pension plans
Non-Qualified Deferred Annuities
A non-qualified deferred annuity is a form of annuity where the funds used to invest were already taxed. The only part of these types of annuities that will be taxed is the accrued funds from financial gain in variable rate annuities or gained interest. Non-qualified annuity funding can come from:
● Certificates of deposit (CDs)
● Money market accounts
● Personal savings accounts
Can I Lose My Annuity?
Deferred annuities are generally considered safe investments. While there is a miniscule chance that the bank with which you invest could go bankrupt and you could lose your investment, the chances for this to happen are very low. Moreover, many deferred annuities are protected against loss and associated with insurance guaranty groups.
Selling Your Deferred Annuity Payments
Reaching your financial goals often requires hard work, and we understand that. In the case of an annuity, you do have the money, but you don’t have access to it just yet. Sometimes, however, you need your money sooner than anticipated. With our help, you can sell your annuity payments for an immediate lump sum of cash. Contact Peachtree Financial Solutions today to learn about how we can help you reach your financial goals.