Annuity FAQ

Frequently Asked Questions¹

Q: What is a tax-deferred annuity?

A: An annuity is a contract issued by an insurance company and is usually referred to as an annuity contract.

What makes annuities different is the tax treatment given to them by the Internal Revenue Service. Since you

already have paid taxes on the money you deposit in an annuity, it never again will be subject to taxation (an

IRA, TSA, 401(k) and 457 plan may differ).

Q: What does tax-deferred mean?

A: Tax-deferred means postponing your taxes on interest earnings until a future point in time. In the meantime,

you earn interest on the money you are not paying in taxes. This means you can accumulate more money over

a shorter period of time.

Q: What are some of the advantages of investing my money in a tax-deferred annuity?

A: Some of the advantages are as follows:

1. Safety

State laws require that all insurance companies have, at all times, a reserve that is equal to the withdrawal

value of an annuity contract. Plus, additional levels of capital, surplus and legal reserves are mandatory, which

also increases an annuity holders protection. In addition, all annuity contracts are backed, in the State of New

York, by The Guarantee Insurance Fund for $500,000, with similar funds in place nationwide. The Guarantee

Insurance Fund is similar and comparable to FDIC on bank accounts and CD's. Accept that FDIC will only

cover an account up to $100,000 and The Guarantee Insurance Fund will cover an annuity account up to

$500,000.

2. No more 1099's

There is no withholding tax while your annuity is compounding, it is completely tax-deferred.

3. Avoid probate

Your annuity contract may be transferred to your named beneficiaries, avoiding the expense, delay, frustration

and publicity of the probate process. Like most assets, the annuity is part of your taxable estate. Your heirs can

generally choose to receive a lump sum payment or a guaranteed monthly income.

Q: What are some of the tax advantages of an annuity?

A: You pay no taxes while your money is compounding. You can also pay a lower tax on random withdrawals

because you control the tax year in which the withdrawals are made, and only pay taxes on the interest portion

that is withdrawn. Tax deferral gives you control over an important expense - your taxes. Any time you can

control an expense, you can minimize it. The longer you can postpone this particular expense, the greater your

gain when compared to the gain you would make with a fully taxable account.

Q: How does a tax-deferred annuity compare to a taxable investment?

A: To illustrate the increased earnings capacity of a tax-deferred annuity, let's compare it to a fully taxable one.

With an investment of $25,000 at 6%, over the course of one year, it will earn $1,500 of interest. A 28% tax

bracket means that approximately $420 of those earnings will be lost in taxes, leaving only $1,080 to

compound the next year. If these same earnings were tax-deferred, the full $1,500 would be available to earn

even more interest. The longer you can postpone taxes, the greater the gain.

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¹annuities may not be available in all states