Deferred Annuity

Example

“At age 45, Michael purchased a deferred annuity with $100,000, allowing it to grow tax-free for 20 years before beginning monthly retirement income payments at age 65.”

Memory Tip

Remember 'Deferred = Delayed gratification' - you wait to receive payments while your money grows tax-free for retirement.

Why It Matters

Deferred annuities provide tax-advantaged retirement savings beyond traditional 401(k) and IRA contribution limits. They offer guaranteed growth options and can provide lifetime income streams, helping retirees avoid outliving their money while reducing current tax burdens.

Common Misconception

Many people think deferred annuities are completely tax-free, when actually they're tax-deferred - you'll pay taxes on growth when you withdraw money. Another misconception is that all deferred annuities offer the same returns, when in reality they come in fixed, variable, and indexed varieties with very different risk and return profiles.

In Practice

A 50-year-old investor contributes $50,000 to a fixed deferred annuity earning 4% annually. After 15 years at age 65, the account grows to approximately $90,047 without paying taxes on the $40,047 in growth. When they begin taking $500 monthly payments, only the growth portion of each payment is taxable as ordinary income. If they had invested the same $50,000 in a taxable account earning 4%, they would have paid annual taxes on growth, leaving them with significantly less money at retirement due to the compounding effect of tax-deferred growth.

Etymology

From Latin 'differre' (to postpone or delay) and 'annus' (year), describing yearly payments that are postponed until a future time period.

Common Misspellings

Related Terms

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