What Is the Benefit Of Tax-Deferred Growth?
One of the benefits of an annuity is the opportunity for your money to grow tax deferred. This means no taxes are paid until you take a withdrawal, so your money can grow at a faster rate than it would in a taxable product.
The following chart shows how a purchase payment of $100,000 grows in a tax-deferred annuity compared to a taxable product over the course of 20 years.
After paying a 25% tax on its earnings, the tax-deferred annuity outgrew the taxable product by more than $8,000.
This graph assumes the taxable product and the tax-deferred annuity grow at an annual rate of 4%. This is a hypothetical scenario for illustration purposes only, and does not reflect interest rates of any specific fixed annuity offered by Great American Life or Annuity Investors Life.
For the taxable product, the graph also assumes the amount needed to pay taxes is deducted annually and no other withdrawals are taken during the 20-year period. For the tax deferred annuity, it assumes no withdrawals are taken during the 20-year period.
Lower capital gains and dividend tax rates would make the taxable investment more favorable than the rate illustrated and reduce the difference in performance between these accounts. Consider your current and anticipated tax brackets in making your decision, as they may also impact comparison results.
This information is not intended or written to be used as legal or tax advice. It was written solely to provide general information and support the sale of annuity products. You should seek advice on legal or tax questions based on your particular circumstances from an attorney or tax advisor.
The graph compares a $100,000 taxable investment to a $100,000 tax-deferred investment, such as a non-qualified annuity. Certain qualified investments, such as a traditional IRA, offer an upfront tax deduction or exclusion for contributions. Other qualified investments, such as a Roth IRA, offer a tax exclusion for earnings. The value of these additional benefits is not illustrated.
For contracts that offer an upfront tax deduction or exclusion, the full amount withdrawn is generally subject to income tax. For a non-qualified annuity, only the gains are subject to income tax. If you are under age 591/2, the taxable amount withdrawn from a qualified or non-qualified annuity is generally subject to a 10% federal penalty tax.