It is vital that one starts saving and investing in the early working years. Then the benefits of long-term investments are excellent and one can even consider retiring early. However if you haven’t been investing from the onset of your professional life, it is never too late. When considering making an investment most people are unsure about what they should be looking for in an investment tool. Is the interest rate most important, the term of the investment or the amount of risk it carries? Interestingly most people overlook one of the main features of investment products that would affect the gains they get from it; whether the investment is tax deferred or taxed. Selecting an investment that is tax deferred has a dramatic effect on the gains from such an investment. Annuities are of many types such as the equity-indexed annuity, fixed rate annuity and deferred annuity, and while the features, terms and conditions of these annuities may vary, what is common is the manner in which they help the investors create a retirement plan for themselves and also that they are all tax deferred.

What is a Tax Deferred Annuity?

A tax deferred annuity essentially means that the gains from the annuity are not taxed on a yearly basis but in fact only when one receives income from it or makes a withdrawal. At that point too the gains are treated as ordinary income and for those receiving income close to their retirement they are already in a lower tax bracket. The fact that the tax is not levied yearly leaves more money in the investment plan and allows it to compound, and grow better than for any taxed investment plan.

Tax Deferred Annuity vs. Taxed Investment Plan

To illustrate the advantage of a tax deferred annuity over a taxed investment plan one can take a simple example of two brothers, Kevin, who has invested in a tax deferred annuity and Sam who has selected a taxed investment plan. Both brothers have invested a single premium of 10,000 for 30 years in investment products that offer a 3% rate of interest. Sam’s investment is taxed yearly and after 30 years he receives $17,849. Kevin on the other hand receives $24,273 and after deducting taxes he gets $19,277 far more than his brother. Another aspect of the tax deferred annuity that needs to be highlighted is the fact that tax is levied only on the gains that are received as income or withdrawn. Thus if you invest in an immediate annuity you are only taxed on the gains that you are receiving on a regular basis, i.e. at a time only a part of the gains are taxed.

Since annuities are tax deferred they are capable of allowing your investment to grow at much better pace than a taxed investment plan could. So invest in an annuity today, after consultation with an annuity advisor.