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What is a Tax Deferred Annuity?: Fixed and Variable Annuities

Many people are not aware of the different types of annuities. Most people do not even bother to think of what kind of annuity should they purchase before retirement. There are many annuities to choose from like the immediate annuity for those who would want to gain income after retirement, and then individual retirement account annuities which are for those people who want control over their monthly withdrawal of income though still want their money to be secured. And of course, there is the tax deferred annuity.

Most people are not aware of what a tax deferred annuity is and sometimes confuse it with immediate annuities. As a customer should know that annuities have two phases that is the accumulation phase where the money is paid to the insurance firm and the payout phase where, after a span of time the customer may use his own savings as pension. This is common in all annuities, as long as there is accumulation where in time the accumulation will grow with the interest rates set by the insurance firm-for fixed annuity or it may depend, rise or fall-to fluctuate, if it is a variable annuity. Nevertheless the annuity grows, due to the tax deferrals during the accumulation phase. Before explaining the tax deferred annuity, a customer must be sure to understand that a tax deferred annuity is not the same as a tax-free investment. Tax free investments are those gains which have no taxes applied to them these are municipal bonds. Now tax deferred annuity gains can be taxed upon withdrawal of funds from the annuity. Tax deferred annuities are powerful annuities which if matured over a period of time with high interest rates can be made to gain more.

A tax deferred annuity is an annuity where the income tax of the annuitant is not taxed upon the accumulation stage and it is only taxed upon the payouts of the periodic withdrawals. The advantages of a tax deferred annuity is in the term itself-the tax deferrals. This is a way to build wealth for retirees, the investment of money and the gains are tax free and only when the periodic payouts are given will it be taxed. Now an annuitant can choose from a fixed annuity or a variable annuity which are both tax deferred annuities.

A fix annuity is the oldest form of tax deferred annuity now the fixed annuity works in a way that the provision in the annuity contract would state a fixed rate of investment to the annuitant, these rates are somewhat secured though may differ though the length of the accumulation period. In a variable annuity however the investment returns are not contractually fixed therefore meaning to say the rates of investments vary. Although these two types of tax deferred annuity may somehow differ in means of the contract rates of investment, the tax free accumulation period still is the same as well as the periodic payouts. Though the fixed annuity the gains may be determined the variable may have periodic withdrawals with larger tax chargers though with a larger gain.