There are all kinds of benefits of annuities, but the one that offers the greatest advantage is that you can avoid paying taxes on your contributions. This is the amazing tax benefit of annuities. Your contributions are added before and without paying any taxes!
This allows you to stow away a larger nest egg because you can defer the payment of taxes until you cash out of the annuity. What this essentially means is that all of the contributions you make get to stack up quicker, which gets to earn more interest than it would if you paid taxes first.
The bigger the principal investment, the greater the interest payments will be, although you will still pay taxes on these earnings.
The Advantages of Annuities
Not only are the great tax deferral benefits of annuities an amazing advantage for an investment, but there are other advantages of annuities as well. Unlike some of the other types of retirement accounts that are also tax deferred, for instance the 401(k) and IRA accounts, there is no limit on the annual contribution you can make to the annuity.
Having no annual contribution cap means that you are free to invest as much of your own salary as you would like. If you want to save very aggressively for ten years, then by all means go for it.
The reason this is such an advantage is the benefit it provides to those who didn’t invest earlier in their careers. People who are closer to their retirement age and need to play catch up on their investments can choose an annuity and start blasting away with the contributions.
The Tax-Deferral Annuity Benefit
Why is tax deferral such a huge annuity benefit? Consider that your contributions into the annuity are not charged tax, and therefore you have a greater principal to earn interest on. This is great, but it’s not the whole story. The real benefit is that the investment continues to compound throughout the many years, which only becomes more principal to earn more interest.
Every single dollar you invest earns for you, and every earned dollar can begin earning as well, all without any interference from taxes. This is the huge advantage of annuities over any kind of taxable account. Keeping every dollar making you more money towards your retirement is the key.
At the end of your investment period, you will be ready to receive your payments. Once you start to cash out, you’ll have to decide if you want a lump-sum payment or a steady stream of guaranteed payments from the annuity stockpile. That is your choice, but how you choose will affect how much taxes you pay, because you didn’t think you’d get out of it did you? There are only so many benefits of annuities, you can’t have it all!