The Tax Deferred Annuity to the Rescue!

The tax deferred annuity offers a glimmer of hope to many who neglected their retirement provision. The different annuity products offered by insurance companies are rather complex, but they have in common the benefit of tax deferral.

As I argued elsewhere on this Website, your retirement provision should start with your first paycheck. But, in my case, I didn't get serious about it until age 50. My guess is that – if you are reading this – you might be in the same position!

The retirement provision plans that are the most efficient are those where your regular contribution is not taxed and your employer makes a matching contribution – that's free money and not taxed either. The income earned by the plan is also not taxed. The growth of these provision accounts is exponential. Only when you start withdrawing from your provision plan would you pay tax on the amount withdrawn.

So, the smart thing to do is to contribute, as much as the rules allow, to one of these plans available to you. But what happens when your calculations show that despite your increased un-taxed contributions you are still not going to accumulate adequate funds for retirement?

This is where the tax deferred annuity comes to the rescue! You put all your savings into an annuity account and make regular contributions to the account. All this money has already been taxed. But the earnings of this account is not taxed. Rules differ, but if income tax becomes due, it would be on the interest portion of the earnings in the account when you start withdrawing.

The growth in the annuity account is much better than a normal savings account. The interest rates and growth potential are invariably better than in a normal savings account or mutual fund. So you experience a bit of a turbo boost on your savings.

A word of caution: Do not withdraw from your annuity account when you need cash before your retirement. There will be penalties involved and you'll undo all the benefits that accumulated.

Read also our discussion on the annuitization of your retirement savings for more insight.

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