The tax favorable treatment of an annuity can be overlooked while planning for retirement. And it could be a very expensive retirement planning tool to miss.
An annuity provides unique treatment of your retirement dollars in two very important ways.
First, the money that is deposited into an annuity earns interest on a tax deferred basis. In other words, you don't have to pay taxes on the money you earn until you begin drawing it out for income. So all the money you earn over the years grows and compounds without being reduced by taxes. |
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Secondly, when you do retire, the amount of cash you placed in the annuity is not taxable when you draw it out for living expenses. You paid taxes on that money as you earned it over the years. Now at retirement time you only need to pay taxes on the interest that has been earned in the annuity over time.
To illustrate this please answer the following questions:
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