Annuities are tax deferred investments, not tax free investments. There are no tax free annuities. Along with other insurance products, annuity taxation shares a unique tax advantage allowing the investment gains to grow Tax Deferred.
Why Should You Care About Annuity Taxation?
A stock dividend, bond interest payment, private trust deed interest payment, CD, or any other ordinary income generating investment is taxed currently, meaning the interest income that you receive is taxed each year, and tracked via 1099 statement. A Certificate of Deposit yielding 5% incurs ordinary income tax on that 5% interest payment, each and every year.
Be sure to visit our section on Annuity Vs CD for more information.
An annuity may yield the same 5%, but the income in it accrues, and compounds, each and every year without tax, subject only to the terms of your annuity contract. Einstein referred to compounding interest as the 8’th wonder of the world, for good reason. Be sure to check out The Annuity Report on how to select and judge annuity products.
What’s The Summary Of Annuity Taxation?
What does this mean? Annuities have many Tax Deferred advantages over certificates of deposit and most other current income investments. To compare the guaranteed yield on a tax deferred annuity to the yield on investments like Certificated of Deposits, is to compare apples and oranges after tax, with annuities often the clear winner. Please be sure to check out our Annuity Vs CD section, and explore this website for more information on this important feature of Annuity Taxation.