You can get more out of the money you earn if you can cut back on the taxes that you're liable for. When it comes to annuities that are part of your retirement plan, it's important to realize that there are many tax advantages you can enjoy.
While a fixed indexed annuity is generally just a supplement to a main retirement plan, it offers great potentials for improving a retiree's quality of life with supplemental income that can take advantage of market growth while protecting funds from taxes.
The following are three of the ways that a fixed indexed annuity can help a retiree to lower his or her tax liability:
There are no contribution limits set by the Internal Revenue Service.
For many people, an IRA or a 401(k) is one of the main sources of financial support during retirement. While these types of accounts are great tools for saving for retirement, it's important to be aware of the fact that the IRS puts limits on how much an employee can contribute to such accounts in a given year. While taxes are deferred on the money that's put toward these types of accounts, only so much money can go into them in a year.
On the other hand, there are no limits on how much an individual can contribute to a fixed indexed annuity in a year. Therefore, an individual with a fixed indexed annuity can enjoy limitless tax deferred income.
There is tax deferment on any interest income you have from the annuity account.
Many interest earning accounts require interest to be claimed in one's tax return at the end of the year. However, this is not the case with a fixed indexed annuity.
With a fixed indexed annuity, interest is tax deferred. Tax doesn't need to be paid on this interest until the account holder begins drawing money from the account during retirement.
When you're retired, payments to you from the account won't be subject to full tax if they're annuitized.
With a fixed indexed annuity, taxes aren't paid on income in the annuity account until the account holder begins drawing from the account upon retirement. However, a fixed indexed annuity can be set up so that even these payments are not fully taxed.
If payments on the account during retirement are annuitized so that the annuity account is gradually drawn from through regular payments, payments will only be subject to tax on the principal and not on the interest earned on the funds in the account.