Annuity Tax Deferred Strategies

For all annuities, the growth of the money invested is tax deferred, but annuities can be purchased with pretax income and be tax deferred, or they may be purchased with money that has already been taxed. The type of income (pretax or after-tax) with which an annuity is purchased determines whether it qualifies for tax-deferred status.

Those annuities purchased with pretax income qualify for tax-deferred status as the money invested in them has never been taxed. Qualifying annuities are purchased at retirement with funds that have been invested in a qualified retirement plan and have grown tax free. Qualifying annuities can also be bought periodically over the working life of the annuitant with money that is not yet taxed. Annuities that are purchased with money that has already been taxed at the income source do not qualify for tax-deferred status. These are usually purchased at retirement or during the working life of the annuitant.

The advantage of a qualified annuity is tax-free growth on invested money, and tax is deferred until the money is paid out. The advantage of an unqualified annuity is tax-deferred growth on the income made from taxed money invested in the annuity.

In the case of either qualified or unqualified annuities, when the annuitant passes away, the beneficiary will owe very high taxes on the investment income. Beneficiaries do not enjoy tax-free status on annuities received. When annuitants are estate planning, it is important they consult with a specialist or do very careful research to ensure that their loved ones are not being left with a tremendous tax burden.

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