A fixed deferred annuity also referred to as a tax-deferred annuity or a deferred single premium annuity, is a contract between you and an insurance carrier with guaranteed interest and guaranteed income options. The insurance company credits interest, and you don't pay taxes on the earnings until you withdraw or begin receiving a monthly annuity income. Your annuity contract earns a competitive return that is very safe. It is called tax-deferred because taxes on the interest you earn are postponed until a future point in time. In the meantime you earn interest on the money you're not paying in taxes. You can accumulate more money over a shorter period of time, which ultimately will provide you with a greater income.
Many use a tax-deferred, single premium annuity as the foundation of their overall financial plan instead of certificates of deposit or savings accounts. Although CDs and Annuities are very similar there are significant differences between the two. The biggest difference is that an annuity will allow for the deferral of the taxes due on the interest earned until the interest is withdrawn. By postponing the tax, your money compounds faster because you can earn interest on the tax dollars that you would have otherwise paid. Later, if you decide to take a monthly income, your taxes can be less because they will be spread out over a period of years. Like CDs, annuities have a penalty for early surrender, however most annuity contracts have a liberal "free withdrawal" provision.
Your tax-deferred annuity is safe. A qualified legal reserve life insurance company is required to meet its contractual obligations to you. These reserves must, at all times, be equal to the withdrawal value of your annuity policy. In addition to reserves, state law also requires certain levels of capital and surplus to further increase policyholder protection.
An annuity policy does not "mature" like a bond or certificate of deposit. Both your principal and interest will automatically continue to earn interest until you decide to start withdrawals or you reach age 100. You have complete flexibility to let your money grow, make withdrawals, or begin receiving an annuity income at any time. There is a tax penalty involved in withdrawals prior to age 59 ½.
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