Stephen Dybwad

Stephen J. Dybwad | Highly Individualized Financial Guidance

Tax Deferred Annuity

Use tax-deferred annuities to manage your future tax liabilities

A tax-deferred annuity is a plan in which income tax on an original deposit of investment income is not charged but deferred until the owner or beneficiary begins to receive (or access funds) periodic payments of earnings from the invested funds. Thus, this benefit is known as tax deferral or deferred annuity.


Tax Sheltered Annuities

One of the most attractive features of a tax-sheltered annuity is a tax deferral, allowed as long as the funds in the annuity are kept intact and not touched by the sheltered annuity owner. The interest or earnings credited to the annuity grow and accumulate tax-deferred until the owner or designated beneficiary access the funds. The accumulated funds in the annuity can then be accessed as a pension or supplemental income for the owner or beneficiaries’ income needs.

Tools can assist the owner in managing the future tax liability of a deferred annuity, and using these tools, the annuity owner can shelter tax liability and use the future accumulated value as an income option. The original deposits or the last funds to be removed from an annuity are never taxed, as the liability is only assessed on the accumulated tax-deferred portion. If the funds are merely removed, the full tax liability of the funds is due.

Partial removal of the tax-deferred results in tax liabilities on the amount removed. But when the sheltered annuity owner uses the funds in a tax-deferred annuity as income with a fixed payment option, the tax liability can be managed and spread over a period chosen by the owner.

Income Tax on Annuities

The exclusion ratio or income option spreads the sheltered liability over a chosen time period. It allows the annuity owner control over the sheltered liability. The insurance company calculates the actual amount of taxable income and tax-free income (the refund of original deposit) when the annuity owner initiates a fixed payment period option. The amount of sheltered tax liability varies based on the original deposit, the accumulated earnings, and the income option selected by the annuity owner.

If a beneficiary inherits an annuity, the entire sheltered liability of the accumulated interest in a tax-sheltered or deferred annuity passes to the beneficiary. If the funds are removed in a lump sum, 100% of the sheltered liability is realized, but the IRS allows for a delay of up to five years in the beneficiary's receipt of income from the sheltered annuity, which provides for tax planning fitting the beneficiaries specific needs and situation.

Guaranteed Annuities Provide Safety and Security

An annuity is a contract sold by insurance companies designed to provide variable payments to the holder at designated periods, usually for retirement. The annuity owner holder is taxed when funds are removed from the annuity. This accumulation benefit is known as tax-deferred or tax-sheltered.

The attractiveness of a fixed annuity may be the guarantees of the contractual benefits it provides. These guarantees are both in minimum guaranteed yield, the guarantee of funds on deposit, and guarantees of future fixed income retirement options.

Annuities are guaranteed by the insurance company issuing the product and regulated by each State Department of Insurance. These guarantees vary from state to state with ranges from $100,000 to $500,000 per annuity owner and will protect them should an insurance company become insolvent. In addition, the state of residence of the annuity owner also provides an overall financial guarantee.

Guaranteed Minimum Yield:

This guarantee provides a fixed guaranteed minimum. The annuity owner will always know the variable earned on the contract. The actual amount of guaranteed yield varies by state, but a reasonable interest rate to consider is 2-3%. Many states allow for lesser or greater rates of returns.

Guarantee of Income Deposits:

The insurance industry is one of the most highly regulated of any industry. Funds in a guaranteed annuity are fully protected against loss of your original deposit, regardless of any outside condition. All fixed (or indexed) annuities provide this guarantee. The guarantee of funds on deposit is based on the insurance company's ability to pay claims.

Guarantee of Settlement Or Income Options:

Most contracts have dozens of available options for settlement. These settlement options can include you, your spouse, and your heirs and can be customized to fit almost any situation with lifetime income options. These options can often have a guaranteed yield rate in calculating the income benefit. Your right to remove your annuity funds in a pre-set formula as income is contractually guaranteed.

Steve Dybwad picture

Stephen Dybwad

Stephen J. Dybwad | Highly Individualized Financial Guidance

Cincinnati, OH, Louisville, KY, Indianapolis and Madison, IN,

(800) 959-3526

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